The Market Effects of Breaking a String of Meeting or Beating Analysts Expectations: Downward Revision of Future Cash Flows or Increase in Cost of Equity Capital?

24 Pages Posted: 16 Mar 2011

Date Written: March 14, 2011

Abstract

This paper parses the negative market reaction to breaking a string of consecutively meeting or beating analysts expectations (hereafter MBE). Using a set of firms that break a string of MBE relative to a control set of firms that do not, I show that, on average, breaking a string of MBE is associated with both decreases in expectations regarding future cash flows and increases in the cost of equity capital. Depending on the length of the string before a break, increases in the cost of equity capital are between 110 and 150 basis points over a three-month period across the break. Overall, my evidence suggests that breaking a string of MBE increases the perceived uncertainty of firms future cash flows and investors required rate of return.

Keywords: meeting or beating analysts expectations, cash flow, uncertainty, cost of equity capital

Suggested Citation

Xie, Yuan, The Market Effects of Breaking a String of Meeting or Beating Analysts Expectations: Downward Revision of Future Cash Flows or Increase in Cost of Equity Capital? (March 14, 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 1-2, pp. 95-118, 2011. Available at SSRN: https://ssrn.com/abstract=1786245 or http://dx.doi.org/10.1111/j.1468-5957.2010.02225.x

Yuan Xie (Contact Author)

Fordham University ( email )

441E Fordham Road
Bronx, NY 10458
United States

HOME PAGE: http://www.fordham.edu/info/22941/full-time_faculty/4970/yuan_xie

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