How Do Firms React to Rivals’ Meeting/Beating Analysts’ Expectations?
Posted: 29 Jun 2011
Date Written: June 28, 2011
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
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