Premium
The Market Reward for Achieving Analyst Earnings Expectations: Does Managing Expectations or Earnings Matter?
Author(s) -
Athanasakou Vasiliki,
Strong Norman C.,
Walker Martin
Publication year - 2010
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2010.02219.x
Subject(s) - earnings , profitability index , incentive , earnings management , accrual , earnings response coefficient , economics , business , stock market , stock (firearms) , financial economics , accounting , finance , microeconomics , mechanical engineering , paleontology , horse , engineering , biology
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.