Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices

Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices This paper investigates whether the market rewards firms meeting current period earnings expectations, and whether any such reward reflects the implications of meeting expectations in the current period for future earnings or reflects a distinct market premium. We document that abnormal annual returns are significantly greater for firms meeting expectations, controlling for the information in the current year’s earnings. We then test whether firms meeting expectations experience higher returns simply because their expected future earnings are also higher. We find firms meeting expectations have significantly higher earnings forecasts and realized earnings than firms that do not. We find that controlling for these higher future earnings, firms meeting expectations in one or two years do not receive a greater valuation than their fundamentals would suggest. We find, however, that the market assigns a higher value to firms that meet expectations consistently, controlling for an estimate of the firm’s fundamental value. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices

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Publisher
Wiley
Copyright
University of Chicago on behalf of the Institute of Professional Accounting, 2002
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/1475-679X.00069
Publisher site
See Article on Publisher Site

Abstract

This paper investigates whether the market rewards firms meeting current period earnings expectations, and whether any such reward reflects the implications of meeting expectations in the current period for future earnings or reflects a distinct market premium. We document that abnormal annual returns are significantly greater for firms meeting expectations, controlling for the information in the current year’s earnings. We then test whether firms meeting expectations experience higher returns simply because their expected future earnings are also higher. We find firms meeting expectations have significantly higher earnings forecasts and realized earnings than firms that do not. We find that controlling for these higher future earnings, firms meeting expectations in one or two years do not receive a greater valuation than their fundamentals would suggest. We find, however, that the market assigns a higher value to firms that meet expectations consistently, controlling for an estimate of the firm’s fundamental value.

Journal

Journal of Accounting ResearchWiley

Published: Jun 1, 2002

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