2009. Making sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts

This paper examines the short and long run performance implications of managing earnings to exceed market expectations. In particular, we examine the performance differences between two groups of firms: (1) firms that marginally exceed consensus forecasts but manage earnings upwards and (2) firms that miss consensus forecasts but do not manage earnings. We choose these two groups because they maximize the likelihood that earnings management activities undertaken by the firm would be able to move the firm from missing the earnings benchmark to beating it. In comparing the performance of these two groups, we find that using accruals or cutting discretionary expenditures to beat expectations results in a short-term positive impact on stock price, but adversely affects the firm in the long-term. We also examine whether managers behave as if they are cognizant of this trade-off and take actions to capitalize on the short-term positive performance impact of beating expectations through earnings management. We find that firms that manage earnings to exceed analyst expectations have significantly greater equity issuances and insider selling in the following year when compared with not only firms tha