How Do Firms React to Rivals’ Meeting/Beating Analysts’ Expectations?

Posted: 29 Jun 2011

See all articles by Chen‐Lung Chin

Chen‐Lung Chin

National Chengchi University

Jiawen Liang

National Chengchi University (NCCU) - Department of Accounting

Date Written: June 28, 2011

Abstract

The paper examines whether firms are more likely to meet or beat analysts’ expectations (MBE) when there are more rivals with non-negative earnings surprises. First, we find that after controlling for rival firms earnings information for the period, firms are more likely to meet analysts’ expectations when a higher proportion of rivals firms meet their analysts’ estimates. Second, we find that the positive association is more pronounced for firms in high competition industries than for firms in low competition industries. Additional analyses indicate that for MBE firms, their managers make decreased use of downward expectations management to avoid negative earnings surprises when there are a higher proportion of MBE rivals firms. The findings indicate that firms have a tendency to meet a higher target when more rivals achieve expectations. Specifically, splitting MBE firms into high and low competition industries, we find that when more rivals meet earnings expectations, firms in high competition industries are more likely to make decreased use of downward expectations management whereas firms in low industries are more likely to make increased use of upward earnings management. We find that although firms meeting expectations are likely to issue earnings reports earlier than expected, and earlier than those missing expectations, our main inferences are not driven by timeliness of earnings reports. Finally, further analyses indicate that our results are robust after controlling for investors’ sentiment.

Keywords: Rival firms, Meeting/beating expectation, Earnings management, Expectations management

Suggested Citation

Chin, Chen Lung and Liang, Jiawen, How Do Firms React to Rivals’ Meeting/Beating Analysts’ Expectations? (June 28, 2011). Available at SSRN: https://ssrn.com/abstract=1874056

Chen Lung Chin (Contact Author)

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Jiawen Liang

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

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