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Corporate investment and earnings surprises

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  • Garen Markarian
  • Sebastien Michenaud

Abstract

We find that firm-level investment is negatively related to the likelihood of meeting or beating analysts’ short-term EPS forecasts. In a 35-year panel dataset of US based companies, we find evidence that suggests firms with the best growth opportunities, opaque firms, and firms with higher than usual bonus compensation, are the ones to alter investment in order to beat benchmarks. Utilizing the passage of Sarbanes-Oxley as a natural experiment we find that firms trade off accruals-based earnings management in lieu of investment cuts. Results are robust to a number of covariates, and endogeneity or reverse causality does not seem to drive our inferences. This study suggests that, consistent with survey results from Graham, Harvey, and Rajgopal [2005. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics 40: 3–73], managers may reduce or delay corporate investment to meet or beat short-term earnings benchmarks.

Suggested Citation

  • Garen Markarian & Sebastien Michenaud, 2019. "Corporate investment and earnings surprises," The European Journal of Finance, Taylor & Francis Journals, vol. 25(16), pages 1485-1509, November.
    • Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1485-1509
    DOI: 10.1080/1351847X.2019.1618361
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    Cited by:

    1. Berrill, Jenny & Campa, Domenico & O'Hagan-Luff, Martha, 2021. "Firm diversification and earnings management strategies: European evidence," International Review of Financial Analysis, Elsevier, vol. 78(C).
    2. Khine Kyaw & Mojisola Olugbode & Barbara Petracci, 2020. "Is the market surprised by the surprise?," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 17(1), pages 20-29, March.

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