Expectations Management and Stock Returns

58 Pages Posted: 9 Nov 2016 Last revised: 28 May 2018

See all articles by Jinhwan Kim

Jinhwan Kim

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: March 26, 2018

Abstract

We establish a link between firms managing investors' performance expectations, earnings announcement premia, and cyclical patterns (i.e., seasonalities) in returns. Firms that are more likely to manage expectations toward beatable levels predictably earn lower returns before, and higher returns during, their earnings announcements. This pattern repeats across firms' fiscal quarters suggesting firms manufacture positive "surprises" by negatively biasing investors' expectations ahead of announcing earnings. We corroborate these findings using non-price-based outcomes indicative of expectations management. Together, our findings are consistent with the pressure for firms to meet earnings targets shaping the cross-section of firms' stock returns.

Keywords: Returns, Anomalies, Expectations Management, Seasonalities, Announcement Premia

JEL Classification: G10, G11, G12, G14, M40, M41

Suggested Citation

Kim, Jinhwan and So, Eric C., Expectations Management and Stock Returns (March 26, 2018). Available at SSRN: https://ssrn.com/abstract=2866522 or http://dx.doi.org/10.2139/ssrn.2866522

Jinhwan Kim

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E62-663 100 Main Street
Cambridge, MA 02142
United States

Eric C. So (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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