Analyst Information Precision and Small Earnings Surprises

46 Pages Posted: 28 Sep 2013 Last revised: 26 Jul 2017

See all articles by Sanjay Bissessur

Sanjay Bissessur

Amsterdam Business School - University of Amsterdam

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Abstract

This study proposes and tests an alternative to the extant earnings management explanation for zero and small positive earnings surprises (i.e., analyst forecast errors). We argue that analysts’ ability to strategically induce slight pessimism in earnings forecasts varies with the precision of their information. Accordingly, we predict that the probability that a firm reports a small positive instead of a small negative earnings surprise is negatively related to earnings forecast uncertainty and present evidence consistent with this prediction. Our findings have important implications for the earnings management interpretation of the asymmetry around zero in the frequency distribution of earnings surprises. We demonstrate how empirically controlling for earnings forecast uncertainty can materially change inferences in studies that employ the incidence of zero and small positive earnings surprises to categorize firms as “suspect” of managing earnings.

Keywords: Earnings surprise, analyst forecast error, forecast uncertainty, analyst incentives, earnings management, discontinuity, benchmark beating

JEL Classification: D80, M41, G24, G29

Suggested Citation

Bissessur, Sanjay and Veenman, David, Analyst Information Precision and Small Earnings Surprises. Review of Accounting Studies, Vol. 21, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2331960 or http://dx.doi.org/10.2139/ssrn.2331960

Sanjay Bissessur

Amsterdam Business School - University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

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