Abstract
Purpose – Using a sample of 9,898 firm-year observations from 1,821 unique Chinese listed firms over the period from 2004 to 2019, this study aims to investigate whether the market rewards meeting or beating analyst earnings expectations (MBE).
Design/methodology/approach –The authors use an event study methodology to capture market reactions
to MBE.
Findings – The authors document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. The authors do not find firms using earnings management to meet or just beat analyst forecasts.
Research limitations/implications – The authors provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market’s over-skepticism of earnings management being a plausible
mechanism for this phenomenon.
Practical implications – The findings of this study are informative to researchers, market participants and
regulators concerned about the impact of analysts and earnings management and interested in detecting and
constraining managers’ earnings management.
Originality/value – The authors provide new insights into how the market reacts to MBE by showing that
the market appears to focus on using meeting or just beating analyst forecasts as an indicator of earnings
management, while it does not detect managed MBE. Meeting or just beating analyst forecasts is commonly
used as a proxy for earnings management in the literature. However, the findings suggest that it is a noisy proxy for earnings management.
Keywords Analyst forecast, Meeting or beating expectations, Market reaction, Earnings management,
Emerging market, China
Paper type Research paper
Design/methodology/approach –The authors use an event study methodology to capture market reactions
to MBE.
Findings – The authors document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. The authors do not find firms using earnings management to meet or just beat analyst forecasts.
Research limitations/implications – The authors provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market’s over-skepticism of earnings management being a plausible
mechanism for this phenomenon.
Practical implications – The findings of this study are informative to researchers, market participants and
regulators concerned about the impact of analysts and earnings management and interested in detecting and
constraining managers’ earnings management.
Originality/value – The authors provide new insights into how the market reacts to MBE by showing that
the market appears to focus on using meeting or just beating analyst forecasts as an indicator of earnings
management, while it does not detect managed MBE. Meeting or just beating analyst forecasts is commonly
used as a proxy for earnings management in the literature. However, the findings suggest that it is a noisy proxy for earnings management.
Keywords Analyst forecast, Meeting or beating expectations, Market reaction, Earnings management,
Emerging market, China
Paper type Research paper
| Original language | English |
|---|---|
| Article number | 3 |
| Pages (from-to) | 184-219 |
| Number of pages | 36 |
| Journal | China Accounting and Finance Review |
| Volume | 25 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 3 Aug 2022 |