A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences

18 Pages Posted: 20 Jan 2004 Last revised: 1 Apr 2014

Lawrence D. Brown

Temple University - Department of Accounting

Marcus L. Caylor

Kennesaw State University

Abstract

Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology to quarterly data for the 1985-2002 time period, we show that, since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases. Our findings suggest that the quarterly earnings threshold hierarchy proposed by Degeorge et al. (1999) does not apply to recent years, and that managers' claim that avoiding quarterly earnings decreases is the threshold they most seek to achieve (Graham et al. 2004) is inconsistent with their actions. We provide an intuitively appealing economic rationale for why the shift in threshold hierarchy occurred; since the mid-1990s, but not before then, investors unambiguously rewarded (penalized) firms for reporting quarterly earnings meeting (missing) analysts' estimates more than they did for meeting (missing) the other two thresholds. We provide several explanations for why investors unambiguously reward firms for reporting quarterly earnings that meet or beat analysts' estimates more than for meeting the other two thresholds late (but not early) in our sample period: increased media coverage given to analyst forecasts, more analyst following, more firms covered by analysts, and temporal increases in both the accuracy and precision of analyst forecasts.

Keywords: Thresholds, propensities, valuation consequences, temporal changes, analyst estimates

JEL Classification: M41, M43, G12

Suggested Citation

Brown, Lawrence D. and Caylor, Marcus L., A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences. Accounting Review, Vol. 80, No. 2, 2005. Available at SSRN: https://ssrn.com/abstract=488222

Lawrence D. Brown (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Marcus L. Caylor

Kennesaw State University ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

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