The Effects of Investor Responses to Meeting Earnings Expectations

• In Event: Disclosure and Investors

Abstract

We develop a measure of the market premium for meeting earnings expectations and test whether inter-temporal variation in this premium affects the proportion of firms that meet or beat expectations. Consistent with managers using recent market outcomes to forecast the market response to their earnings report, we find that the proportion of firms that meet or just beat earnings expectations is greater when the premium for meeting or beating expectations was high in the preceding quarter. Interpreting our measure of the premium as a market signal, we also find that managers respond more to market signals with higher precisions, consistent with Bayesian decision theory. These results are robust to various controls and are also supported by firm-level analysis.

Authors

• Ning Zhang, Queen's University

• Samuel J Melessa, The University of Iowa