Premium
The Market Effects of Breaking a String of Meeting or Beating Analysts’ Expectations: Downward Revision of Future Cash Flows or Increase in Cost of Equity Capital?
Author(s) -
Xie Yuan
Publication year - 2011
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.1468-5957.2010.02225.x
Subject(s) - cash flow , economics , equity (law) , string (physics) , cost of capital , equity capital , monetary economics , financial economics , basis point , capital market , finance , interest rate , microeconomics , mathematics , profit (economics) , political science , law , mathematical physics
This paper parses the negative market reaction to breaking a string of consecutively meeting or beating analysts’ expectations (hereafter MBE). Using a set of firms that break a string of MBE relative to a control set of firms that do not, I show that, on average, breaking a string of MBE is associated with both decreases in expectations regarding future cash flows and increases in the cost of equity capital. Depending on the length of the string before a break, increases in the cost of equity capital are between 110 and 150 basis points over a three‐month period across the break. Overall, my evidence suggests that breaking a string of MBE increases the perceived uncertainty of firms’ future cash flows and investors’ required rate of return.