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

Meeting or Beating Analyst Expectations in the Post‐Scandals World: Changes in Stock Market... Contemporary Accounting Research Vol. 25 No. 4 (Winter 2008) pp. 1067–98 © CAAA doi:10.1506/car.25.4.5 Contemporary Accounting Research We find that the stock market premium assigned to meeting analyst estimates of quarterly earnings or beating by less than one cent per share (“small beaters”) has disappeared in the post-scandals period while the premium assigned to beating expectations by more than a cent per share (“big beaters”) has diminished. These results suggest that the market has become more skeptical of firms that meet or beat expectations after the accounting scandals. We also examine the extent to which the scandals and subsequent regulatory changes have affected managers’ actions to avoid missing analysts’ expectations. We find that the proportion of firms that beat expectations by one cent or less has decreased post-scandals, after controlling for macroeconomic variables and the temporal trend in meeting or beating forecasts. Moreover, the mix of mechanisms employed to meet or beat earnings benchmarks has changed post-scandals. While managers’ propensity to rely on income-increasing discretionary accruals to meet analyst forecasts has decreased, downward expectations management has increased. This result is consistent with less reliance on earnings management, perhaps due to the increased scrutiny on such behavior, and more http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

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

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Publisher
Wiley
Copyright
2008 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
D.O.I.
10.1506/car.25.4.5
Publisher site
See Article on Publisher Site

Abstract

Contemporary Accounting Research Vol. 25 No. 4 (Winter 2008) pp. 1067–98 © CAAA doi:10.1506/car.25.4.5 Contemporary Accounting Research We find that the stock market premium assigned to meeting analyst estimates of quarterly earnings or beating by less than one cent per share (“small beaters”) has disappeared in the post-scandals period while the premium assigned to beating expectations by more than a cent per share (“big beaters”) has diminished. These results suggest that the market has become more skeptical of firms that meet or beat expectations after the accounting scandals. We also examine the extent to which the scandals and subsequent regulatory changes have affected managers’ actions to avoid missing analysts’ expectations. We find that the proportion of firms that beat expectations by one cent or less has decreased post-scandals, after controlling for macroeconomic variables and the temporal trend in meeting or beating forecasts. Moreover, the mix of mechanisms employed to meet or beat earnings benchmarks has changed post-scandals. While managers’ propensity to rely on income-increasing discretionary accruals to meet analyst forecasts has decreased, downward expectations management has increased. This result is consistent with less reliance on earnings management, perhaps due to the increased scrutiny on such behavior, and more

Journal

Contemporary Accounting ResearchWiley

Published: Dec 1, 2008

References

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