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Analyst information precision and small earnings surprises

Author

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  • Sanjay W. Bissessur

    () (University of Amsterdam)

  • David Veenman

    () (University of Amsterdam)

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.

Suggested Citation

  • Sanjay W. Bissessur & David Veenman, 2016. "Analyst information precision and small earnings surprises," Review of Accounting Studies, Springer, vol. 21(4), pages 1327-1360, December.
  • Handle: RePEc:spr:reaccs:v:21:y:2016:i:4:d:10.1007_s11142-016-9370-2
    DOI: 10.1007/s11142-016-9370-2
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    References listed on IDEAS

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    Cited by:

    1. Houdou Basse Mama & Rachidi Kotchoni, 2017. "Investor Relations' Quality and Mispricing," EconomiX Working Papers 2017-33, University of Paris Nanterre, EconomiX.

    More about this item

    Keywords

    Earnings surprise; Analyst forecast error; Forecast uncertainty; Analyst incentives; Earnings management; Discontinuity; Benchmark beating;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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