Consistency in Meeting or Beating Analysts’ Earnings Expectations and Auditor Response

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 9: Auditor Response to Risk

Abstract

Analysts’ earnings expectations have been the most important benchmark at earnings announcements. Extensive prior studies document that firms that have consistently meet or beat analysts’ earnings expectation (hereafter “MBE sting firm”) experience higher market return, lower cost of capital, and higher bond rating relative to the firms with no MBE string. On the other hand, prior studies also document that MBE string firms experience a disproportionately large negative stock price response if their MBE string is broken. Thus, managers of MBE string firms may use various earnings manipulation activities to sustain their MBE strings. However, prior studies have not explicitly investigate auditors’ overall response to MBE string firms. My study fills this gap by showing that audit fees increase along with the length of MBE string. Further analyses show that auditors increase their audit efforts measured by audit delay only if MBE string firms engage in accrual-based earnings management. Last, my study also finds that auditors are more likely to resign from MBE string firms. In sum, the findings suggest that auditors adjust their risk premiums in terms of audit fees and auditor resignation rather than audit efforts in response to MBE string firms.

Author

• Yiyang Zhang, University of South Florida