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

Yuan Xie
University of Utah

Abstract: This paper parses the negative market reaction to breaking a string of consecutive meeting or beating analysts’ expectations (hereafter MBE). Using a set of firms that break a string of MBE relative to a pair-matched control set of firms that do not, I show that on average, breaking a string of MBE leads to both decreases in expected future cash flows and increases in firms’ cost of equity capital. Depending on the number of quarters that firms consecutively MBE before a break, cost of equity capital increases between 1.1% and 1.5% over a three-month-period across the break. I also show that breaks by firms with higher prior information risk are associated with larger increases in cost of equity capital. Overall, my evidence suggests that breaking a string of MBE increases the perceived uncertainty of firms’ future cash flows and investors’ required rate of return. This finding provides new insights into firms’ motivation to MBE.

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