Expectations Management and Stock Returns

Forthcoming, Review of Financial Studies

61 Pages Posted: 9 Nov 2016 Last revised: 7 Aug 2019

See all articles by Travis L. Johnson

Travis L. Johnson

The University of Texas at Austin

Jinhwan Kim

Stanford Graduate School of Business

Eric C. So

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

Date Written: August 2019

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

Johnson, Travis L. and Kim, Jinhwan and So, Eric C., Expectations Management and Stock Returns (August 2019). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2866522 or http://dx.doi.org/10.2139/ssrn.2866522

Travis L. Johnson

The University of Texas at Austin ( email )

2110 Speedway Stop B6600
Austin, TX Texas 78712
United States
6178995325 (Phone)

HOME PAGE: http://travislakejohnson.com

Jinhwan Kim

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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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