Stock Price Reactions to On-Target Earnings Announcements Implications for Earnings Management

GWU Working Paper

39 Pages Posted: 25 Jul 2001

See all articles by William R. Baber

William R. Baber

Georgetown University - Department of Accounting and Business Law

Sok-Hyon Kang

George Washington University - School of Business

Date Written: September 2001

Abstract

We investigate the consequences of earnings management by analyzing stock price reactions to on-target quarterly earnings announcements (earnings that coincide with analysts' consensus expectations) during 1993-1999. We use techniques advanced in Jones (1991), Kang and Sivaramakrishnan (1995), and Collins and Hribar (2000) to distinguish observations where firms apparently manage earnings in order to meet expectations. We find that mean security returns during the earnings announcement period are 0.18% to 0.91% less for observations where firms apparently increase earnings than for those where firms apparently decrease earnings to meet expectations. These differences are statistically significant at conventional levels. We also find that returns during the earnings disclosure period vary inversely with the extent that firms appear to manage earnings upward. Overall, the evidence suggests that market participants are aware of incentives to manage earnings to meet expectations, and that they discount managed earnings components when interpreting quarterly earnings disclosures. Finally, we point out that the issue of stock splits should be investigated with care when using published consensus analyst forecasts.

Keywords: Earnings management

JEL Classification: M41, M43, G14

Suggested Citation

Baber, William R. and Kang, Sok-Hyon, Stock Price Reactions to On-Target Earnings Announcements Implications for Earnings Management (September 2001). GWU Working Paper, Available at SSRN: https://ssrn.com/abstract=275275 or http://dx.doi.org/10.2139/ssrn.275275

William R. Baber (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Sok-Hyon Kang

George Washington University - School of Business ( email )

405 Government Hall
GWU
Washington, DC 20052
United States
(202) 994-6058 (Phone)
(202) 994-5164 (Fax)

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