The Market's Reaction to Unexpected Earnings Thresholds

24 Pages Posted: 16 Mar 2011

See all articles by Don Herrmann

Don Herrmann

Oklahoma State University - Stillwater - School of Accounting

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Jeff L. Payne

University of Kentucky - Von Allmen School of Accountancy

Wayne B. Thomas

University of Oklahoma

Date Written: March 14, 2011

Abstract

We examine differences in quarterly earnings announcement returns as a function of meeting or missing each of three earnings thresholds reporting a profit, reporting an increase in earnings, and meeting analysts forecasts. In contrast to prior research, the research design identifies the incremental market reaction to the profit and earnings increase thresholds, after controlling for the effect of meeting or missing analysts forecasts. Using this methodology, we find little evidence of incremental threshold effects beyond meeting analyst forecasts. In other words, zero earnings and a zero change in earnings do not appear to be special points that elicit a differential response by investors. Our results are robust to including a number of control variables and alternative tests. The fact that we find little evidence to support market-related incentives to manage earnings at the profit and earnings increase thresholds suggests either that managers have other incentives to manage earnings at these thresholds or that managers perceive market rewards and penalties when none exist.

Keywords: analyst forecasts, earnings thresholds, market reaction

Suggested Citation

Herrmann, Don and Hope, Ole-Kristian and Payne, Jeff L. and Thomas, Wayne B., The Market's Reaction to Unexpected Earnings Thresholds (March 14, 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 1-2, pp. 34-57, 2011, Available at SSRN: https://ssrn.com/abstract=1786248 or http://dx.doi.org/10.1111/j.1468-5957.2010.02230.x

Don Herrmann (Contact Author)

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
345 Business Building
Stillwater, OK 74078
United States

Ole-Kristian Hope

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Jeff L. Payne

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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