Faithin Omaha eBook Collection

Download or read book Stock Price Reactions to On-Target Earnings Announcements Implications for Earnings Management written by William R. Baber and published by . This book was released on 2012 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the consequences of earnings management by analyzing stock price reactions to on-target quarterly earnings announcements (earnings that coincide with analysts' consensus expectations) during 1993-1999. We use techniques advanced in Jones (1991), Kang and Sivaramakrishnan (1995), and Collins and Hribar (2000) to distinguish observations where firms apparently manage earnings in order to meet expectations. We find that mean security returns during the earnings announcement period are 0.18% to 0.91% less for observations where firms apparently increase earnings than for those where firms apparently decrease earnings to meet expectations. These differences are statistically significant at conventional levels. We also find that returns during the earnings disclosure period vary inversely with the extent that firms appear to manage earnings upward. Overall, the evidence suggests that market participants are aware of incentives to manage earnings to meet expectations, and that they discount managed earnings components when interpreting quarterly earnings disclosures. Finally, we point out that the issue of stock splits should be investigated with care when using published consensus analyst forecasts.