Attracting Attention in a Limited Attention World: Exploring the Causes and Consequences of Extreme Positive Earnings Surprises

Management Science, Forthcoming

49 Pages Posted: 21 Jun 2015

See all articles by Allison Koester

Allison Koester

Georgetown University

Russell Lundholm

University of British Columbia (UBC) - Sauder School of Business

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: June 11, 2015

Abstract

We investigate why extreme positive earnings surprises occur and the consequences of these events. We posit that managers know before analysts when extremely good earnings news is developing, but can have incentives to allow the earnings news to surprise the market at the earnings announcement. In particular, managers can use an extreme positive earnings surprise to attract investor attention when they believe their stock is neglected and future performance is expected to be strong. Analysts, who must allocate scarce resources across many firms, can also be inattentive and miss signals that suggest good performance is going to be announced. Using various proxies for extreme positive earnings surprises, management expectations for future performance and desire for attention, and analyst neglect, we find evidence that an extreme positive earnings surprise is a predictable event. These findings are incremental to controlling for a firm’s information environment, earnings volatility, and operating leverage. Finally, we show that extreme positive earnings surprises are a successful method for attracting attention, with significant increases in the number of institutional owners, the number of analysts, and trading volume during the subsequent three years.

Keywords: investor attention; extreme positive earnings surprise

Suggested Citation

Koester, Allison and Lundholm, Russell and Soliman, Mark T., Attracting Attention in a Limited Attention World: Exploring the Causes and Consequences of Extreme Positive Earnings Surprises (June 11, 2015). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2620715

Allison Koester (Contact Author)

Georgetown University ( email )

McDonough School of Business
Washington, DC 20057
United States
202.687.6461 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/apk29/

Russell Lundholm

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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