Analyst information precision and small earnings surprises

Sanjay W. Bissessur () and David Veenman ()
Additional contact information
Sanjay W. Bissessur: University of Amsterdam
David Veenman: University of Amsterdam

Review of Accounting Studies, 2016, vol. 21, issue 4, No 9, 1327-1360

Abstract: Abstract This study proposes and tests an alternative to the extant earnings management explanation for zero and small positive earnings surprises (i.e., analyst forecast errors). We argue that analysts’ ability to strategically induce slight pessimism in earnings forecasts varies with the precision of their information. Accordingly, we predict that the probability that a firm reports a small positive instead of a small negative earnings surprise is negatively related to earnings forecast uncertainty, and we present evidence consistent with this prediction. Our findings have important implications for the earnings management interpretation of the asymmetry around zero in the frequency distribution of earnings surprises. We demonstrate how empirically controlling for earnings forecast uncertainty can materially change inferences in studies that employ the incidence of zero and small positive earnings surprises to categorize firms as suspected of managing earnings.

Keywords: Earnings surprise; Analyst forecast error; Forecast uncertainty; Analyst incentives; Earnings management; Discontinuity; Benchmark beating (search for similar items in EconPapers)
JEL-codes: D80 G24 G29 M41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://link.springer.com/10.1007/s11142-016-9370-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:21:y:2016:i:4:d:10.1007_s11142-016-9370-2

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-016-9370-2

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().