Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts

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In this Subject: Finance
By this author: BHOJRAJ, SANJEEV ;&nbsp; HRIBAR, PAUL ;&nbsp; PICCONI, MARC ;&nbsp; McINNIS, JOHN

Authors: BHOJRAJ, SANJEEV; HRIBAR, PAUL; PICCONI, MARC; McINNIS, JOHN

Source: The Journal of Finance, Volume 64, Number 5, October 2009 , pp. 2361-2388(28)

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Abstract:

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.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1540-6261.2009.01503.x

Publication date: 2009-10-01