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

Zhi - Xing Lin
National University of Singapore

Michael Shih
National University of Singapore

Abstract: This study finds that the earnings response coefficient (ERC) for zero and small positive earnigns surprises is lower than ERC’s for earnings surprises in adjacent ranges, especially in the 1998-2003 period, a period featuring a large number of firms reporting zero or small positive earnings surprises. The result suggests investors interpret zero and small positive earnings surprises less positively due to their suspicion that such earnings surprises are the result of earnings and/or analyst expectations management. In additinal tests, the ERC remains lower for zero and small positive earnings surprises after the effects on the ERC of earnings management and analyst expectations management are controlled for. This result raises the possibility that investors penalize firms that report zero or small positive earnings surprises indiscriminately, and not even those that do not engage in earnings or analyst expectations management are spared.

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