Meeting or Beating Analyst Expectations in the Post-Scandals World: Changes in Stock Market Rewards and Managerial Actions

Abstract

The pressure to meet/beat analysts' expectations is often blamed for the recent onslaught of accounting scandals. We investigate changes in the meeting/beating phenomenon post-scandals and find that the stock market premium to meeting or just beating analyst estimates has disappeared while the premium to beating by a larger margin has diminished. In the post-scandals period, managers tend to meet or just beat analysts' forecasts less often. Further, managers rely less on income-increasing discretionary accruals and more on earnings guidance. Consistent with lower earnings management, the relation between meeting/beating and future operating performance has increased post-scandals, suggesting that the decline in market premium is possibly unwarranted.

Keywords: Enron, Sarbanes Oxley, Earnings Management, Analysts Forecasts

JEL Classification: G29, M41, M43, G38, J33