Perverse market rewards for meeting or beating earnings expectations

Mitchell Oler, Terence J. Pitre and Chang Joon Song

Asia-Pacific Journal of Accounting & Economics, 2018, vol. 25, issue 1-2, 57-74

Abstract: Approximately 47 (43) percent of the observations in our sample receive negative (positive) market rewards when they meet (miss) earnings expectations. We define these phenomena as perverse market rewards (PMR). We find that the likelihood of PMR is increased when (i) firms use earnings and/or expectations management; (ii) earnings growth is negative (positive) when earnings expectations are met (missed); and (iii) ownership by transient (dedicated) institutional investors is high when earnings expectations are met (missed). In addition, we find that, when earnings expectations are met (missed), PMR appears to be an indicator of bad (good) future stock performance. Our study demonstrates that gratuitous participation in the ‘numbers game’ does not always result in the desired market rewards.

Date: 2018
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DOI: 10.1080/16081625.2016.1263158

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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