35 Pages Posted: 30 Jun 2003
Date Written: June 19, 2003
This paper examines the role of earnings quality in the future performance of firms that marginally miss or beat analysts' forecasts. We focus primarily on two groups of firms: those that miss their forecast but appear not to have attempted to exceed it by managing earnings, and those that exceed their forecast but appear to have done so through accruals or reducing discretionary expenditures. We find that while the miss/beat effect is initially stronger, earnings quality manifests itself over a longer horizon. During the first year, markets seem to react more strongly to the miss-beat effect, with firms that beat analyst forecasts despite a low quality of earnings outperforming firms that miss their forecasts despite reporting high quality earnings. During the second and third years, however, the performance of firms that missed their forecasts while maintaining high quality earnings exceeds the firms that beat their forecasts with low quality earnings. This holds for both future returns and future earnings changes. Our results suggest that while beating expectations has short-term benefits, there are negative long-term consequences associated with managing earnings in order to do so.
Keywords: miss, beat, earnings management, analysts forecast
JEL Classification: M41, M43, G14, G29
Suggested Citation: Suggested Citation
Bhojraj, Sanjeev and Hribar, Paul and Picconi, Marc, Making Sense of Cents: An Examination of Firms that Marginally Miss or Beat Analysts Forecasts (June 19, 2003). Available at SSRN: https://ssrn.com/abstract=418100 or http://dx.doi.org/10.2139/ssrn.418100
By Ron Kasznik