Consistency in Meeting or Beating Earnings Expectations and Management Earnings Forecasts

In Ho Suk, Purdue University

Abstract

Prior literature shows that the market rewards stocks with a 'consistent' record of meeting or beating analysts' earnings expectations (MBE). However, this valuation consequence may distort voluntary disclosure policy, which managers use opportunistically in order to maintain consistency in MBE. This paper investigates whether managers' decisions on and analyst reaction to management forecasts are significantly related to consistency in MBE, after controlling for the historical tendency of earnings or expectations management. First, I find that the firms with consistent MBE provide more frequent and pessimistic management forecasts than other firms. This suggests that managers of firms having achieved consistent MBE are more likely to guide analysts' expectations downward in order to avoid breaking their string of MBE. I also find that analysts discount the credibility of management forecasts of these firms in their revision process. This implies that analysts understand the opportunism behind the management forecasts of these firms. Finally, I provide evidence that Regulation FD intensified the tendency of these firms to issue more frequent and pessimistic forecasts. This suggests that Regulation FD has reinforced the propensity of these firms to use management forecasts as a guidance mechanism in attaining MBE.

Degree

Ph.D.

Advisors

Kross, Purdue University.

Subject Area

Accounting

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