Sanjeev Bhojraj
Cornell University
Paul Hribar
Cornell University
Marc Picconi
Cornell University
Abstract: This paper examines the interaction between whether a firm misses or beats analyst forecasts and the firms earnings quality. In particular, we develop an indicator of earnings quality using both accruals and discretionary cash expenditures, and use this measure to partition the firms that just miss or just beat, based on the likelihood that they managed earnings towards the benchmark. We then compare the future performance of these groups, to examine the consequences of managing earnings in order to exceed the consensus forecast versus missing the forecast but not resorting to earnings management. We provide evidence that firms falling marginally short of expectations without resorting to earnings management are no worse off, and in most cases better off, than firms that may have managed earnings in order to beat expectations, with respect to both future returns and future earnings changes.
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