The market reward for achieving analyst earnings expectations: Does managing expectations or earnings matter?

Vasiliki Athanasakou, Norman C. Strong, Martin Walker

Research output: Contribution to journalArticlepeer-review

Abstract

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. © 2010 Blackwell Publishing Ltd.
Original languageEnglish
Pages (from-to)58-94
Number of pages36
JournalJournal of Business Finance and Accounting
Volume38
Issue number1-2
DOIs
Publication statusPublished - Jan 2011

Keywords

  • Analyst Expectations
  • Classification Shifting
  • Earnings Forecast Guidance
  • Earnings Management
  • Informative
  • Market Reward
  • Opportunistic

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