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The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or Earnings Matter?

The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or... Abstract: This study explores the market response to achieving analyst earnings expectations, distinguishing between expectations achieved through earnings forecast guidance and earnings management. We consider three earnings management tools: real earnings management, working capital accruals management, and classification shifting. Analysis indicates that UK firms use earnings forecast guidance and classification shifting to achieve analyst expectations. The market does not reward firms that achieve expectations through forecast guidance, and achievers that classification shift receive a lower market reward than genuine achievers. The market response aligns with information on future profitability and rational pricing tests show that there is no overall mispricing of achievers. Evidence of stock price incentives to engage in earnings forecast guidance is found only within more opportunistic downward forecast revisions mainly driven by high market growth expectations. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Finance & Accounting Wiley

The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or Earnings Matter?

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References (100)

Publisher
Wiley
Copyright
© 2010 Blackwell Publishing Ltd
ISSN
0306-686X
eISSN
1468-5957
DOI
10.1111/j.1468-5957.2010.02219.x
Publisher site
See Article on Publisher Site

Abstract

Abstract: This study explores the market response to achieving analyst earnings expectations, distinguishing between expectations achieved through earnings forecast guidance and earnings management. We consider three earnings management tools: real earnings management, working capital accruals management, and classification shifting. Analysis indicates that UK firms use earnings forecast guidance and classification shifting to achieve analyst expectations. The market does not reward firms that achieve expectations through forecast guidance, and achievers that classification shift receive a lower market reward than genuine achievers. The market response aligns with information on future profitability and rational pricing tests show that there is no overall mispricing of achievers. Evidence of stock price incentives to engage in earnings forecast guidance is found only within more opportunistic downward forecast revisions mainly driven by high market growth expectations.

Journal

Journal of Business Finance & AccountingWiley

Published: Jan 1, 2011

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