Download this Paper Open PDF in Browser

Are Benchmark Beaters Doing Anything Wrong?

48 Pages Posted: 24 Apr 2000  

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Scott A. Richardson

AQR Capital Management, LLC; London Business School

A. Irem Tuna

London Business School

Date Written: April 10, 2000

Abstract

Prior research has documented the empirical regularity that more firms than expected (i) report small positive earnings and (ii) have zero forecast errors. It appears that management avoid reporting negative earnings or disappointing analysts. We investigate how and why firms beat these benchmarks (benchmark beaters).

We document that benchmark beaters have high accruals and unusual levels of special items relative to other firms. We find that a strong motivation for reporting small profits is to delay reporting bad news. We find that small profit firms show a decline in earnings and exhibit poor stock price performance over the following year. In contrast, we find that firms with zero forecast errors do well in the future. These firms have positive abnormal returns over the following year. We document that zero forecast error firms are high growth, high market capitalization firms. We argue that these firms want to avoid disappointing analysts since they are most likely to suffer from the "torpedo effect": small earnings disappointments lead to large stock price declines.

Keywords: Earnings management, accruals, benchmark

JEL Classification: M41, M43, G29

Suggested Citation

Dechow, Patricia M. and Richardson, Scott A. and Tuna, A. Irem, Are Benchmark Beaters Doing Anything Wrong? (April 10, 2000). Available at SSRN: https://ssrn.com/abstract=222552 or http://dx.doi.org/10.2139/ssrn.222552

Patricia M. Dechow (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Ayse Irem Tuna

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Paper statistics

Downloads
1,942
Rank
5,886
Abstract Views
6,798