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Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts
Author(s) -
BHOJRAJ SANJEEV,
HRIBAR PAUL,
PICCONI MARC,
McINNIS JOHN
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01503.x
Subject(s) - accrual , earnings , insider , equity (law) , stock (firearms) , business , beat (acoustics) , insider trading , cash flow , monetary economics , economics , finance , accounting , financial economics , mechanical engineering , physics , political science , acoustics , law , engineering
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.