Does the market reward meeting or beating analyst earnings forecasts? Empirical evidence from China

Author:

Luo Guqiang,Wang Kun TracyORCID,Wu YueORCID

Abstract

PurposeUsing a sample of 9,898 firm-year observations from 1,821 unique Chinese listed firms over the period from 2004 to 2019, this study aims to investigate whether the market rewards meeting or beating analyst earnings expectations (MBE).Design/methodology/approachThe authors use an event study methodology to capture market reactions to MBE.FindingsThe authors document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. The authors do not find firms using earnings management to meet or just beat analyst forecasts.Research limitations/implicationsThe authors provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market's over-skepticism of earnings management being a plausible mechanism for this phenomenon.Practical implicationsThe findings of this study are informative to researchers, market participants and regulators concerned about the impact of analysts and earnings management and interested in detecting and constraining managers' earnings management.Originality/valueThe authors provide new insights into how the market reacts to MBE by showing that the market appears to focus on using meeting or just beating analyst forecasts as an indicator of earnings management, while it does not detect managed MBE. Meeting or just beating analyst forecasts is commonly used as a proxy for earnings management in the literature. However, the findings suggest that it is a noisy proxy for earnings management.

Publisher

Emerald

Subject

General Medicine

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