An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Mei Cheng
University of Southern California

Abstract: In this paper, I hypothesize that market reaction to meeting/beating (missing) earnings expectations should depend on its unexpected component, which is related to the ex ante probability that a firm will meet/beat expectations (MBE probability). I first empirically model the ex ante MBE probability. I then generate out-of-sample estimates of the MBE probability. As predicted, I find that for firms with high MBE probabilities, three-day abnormal returns around earnings announcements are less positive (more negative) when meeting/beating (missing) consensus analysts’ forecasts than for firms with low MBE probabilities. These results are robust to controlling for unexpected earnings and other determinants of stock returns around earnings announcements. Overall, I contribute to the literature on meeting/beating expectations by providing a rational explanation for cross-sectional variation in market reaction to meeting/beating or missing earnings expectations.

Back to Session Listing

AAA Home Page