Habitual Earnings Surprises, Earnings (Expectations) Management, and Market Valuation

Abstract

This study examines characteristics, managerial behavior, and market valuation of U.S. firms that habitually surprise the market. Results show that compared to firms that habitually miss analysts’ forecasts by a small margin, all other habitual groups apply income-increasing discretionary accruals. In addition, firms that habitually beat analysts’ forecasts by big margins also resort to income-increasing real earnings management, and firms that habitually meet/marginally beat analysts’ forecasts apply downward analysts’ forecast management. Valuation tests reveal that none of the other habitual firms fare better than firms that habitually miss analysts’ forecasts by a small margin. In particular, firms that habitually meet/marginally beat analysts’ forecasts by using income-increasing accruals earnings management and downward analysts’ forecast management experience a significant value reduction measured in Tobin’s Q.