Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts

Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts ABSTRACT This paper examines the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts. We show that firms that just beat analyst forecasts with low quality earnings exhibit a short‐term stock price benefit relative to firms that miss forecasts with high quality earnings. This trend, however, reverses over a 3‐year horizon. Additionally, firms reducing discretionary expenditures to beat forecasts have significantly greater equity issuances and insider selling in the following year, consistent with managers understanding the myopic nature of their actions. Our results confirm survey evidence suggesting managers engage in myopic behavior to beat benchmarks. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts

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Publisher
Wiley
Copyright
© American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.2009.01503.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper examines the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts. We show that firms that just beat analyst forecasts with low quality earnings exhibit a short‐term stock price benefit relative to firms that miss forecasts with high quality earnings. This trend, however, reverses over a 3‐year horizon. Additionally, firms reducing discretionary expenditures to beat forecasts have significantly greater equity issuances and insider selling in the following year, consistent with managers understanding the myopic nature of their actions. Our results confirm survey evidence suggesting managers engage in myopic behavior to beat benchmarks.

Journal

The Journal of FinanceWiley

Published: Oct 1, 2009

References

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