The Market Premium to Meeting or Beating Analysts

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Working Paper Series

The market premium to meeting or beatinganalysts forecasts: further evidence from the UK

Young-soo ChoiStephen Lin

Manchester Business School Working Paper No. 509June 2006

Manchester Business SchoolCopyright 2006, Choi and Lin. All rights reserved.Do not quote or cite without permission from the author.


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Author(s) and affiliation

Young-soo ChoiLancaster UniversityBailriggLancasterLA1 4YWTel: +44(0) 1524 65201

Stephen LinAssociate Professor of AccountingCollege of Business AdministrationFlorida International UniversityMiamiFL 33199, USATel: (305) 348-2582E-mail: [email protected]

Abstract

Using a large UK sample during 1990-2003, we find UK firms that meet or beat earningsexpectation enjoy a positive and significant market premium especially for firms with positiveforecast revisions and errors. The market premium to beat expectations is higher than thepremium to meet earnings expectations. We also find some evidence that the premium tobeat earnings expectations is higher than the penalty to miss earnings expectations.Consistent with US evidence, UK firms also engage in expectations management to meet or

beat earnings expectations. An important finding is that forecast revisions of future earningsare a more significant factor in explaining the abnormal share returns than the effect ofearnings surprises. This suggests that unlike US counterparts, UK investors do not simplyfixate on earnings surprises.

How to quote or cite this document

Choi, Young-soo, & Lin, Stephen. (2006). The market premium to meeting or beating analystsforecasts: further evidence from the UK. Manchester Business School Working Paper,Number 509, available: http://www.mbs.ac.uk/research/working-papers.aspx.


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1. Introduction

Many US studies document that a significant proportion of US firms in recent years

report their earnings either slightly above analysts forecasts or exactly on target (Brown,

2001; Matsumoto, 2001), and that US firms engage in expectations management (e.g.

Skinner, 1997; Kasznik and Lev, 1995, Francis et al, 1994; Soffer et al, 2000) or earnings

management (Burgstahler and Eames, 2003; Payne and Robb, 2000; Kasznik, 1999) tomeet or beat current analysts earnings expectations (hereafter referred to as MBE). Some

studies also investigate the potential benefit of MBE for company investors. For instance,

Kasznik and McNichols (2002) document a valuation premium to MBE that is associated

with future profitability, which is, however, not fully captured by analysts future

forecasts of earnings. Lopez and Rees (2002) find that the earnings response coefficient

(ERC) is significantly higher for firms that meet or beat analysts forecasts, indicating

that earnings quality may have played an important role in MBE.

A most recent study by Bartov, Givoly, and Hayn (2002, hereafter referred to as BGH)

investigates the premium to MBE and examines the extent to which earnings and

expectation management have impacted upon the premium to MBE. Using the portfolio

tests, BGH find the abnormal returns for firms that beat earnings expectations are

consistently higher than those that merely meet or miss earnings expectation in every

error-size portfolio and expectation management path based on the direction of forecast

revision and earnings surprise upon the earnings announcement.

BGH also find before including earnings surprise the quarterly return for US firms that

MBE during 1983-1997 is already 2.3% higher than other firms. BGH also document that

1% earnings surprise is associated with an incremental quarterly return of about 0.5%.


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Consistent with the expectations management hypothesis, BGH show that the percentage

of negative earnings surprises over the entire sample is significantly smaller than the

percentage of negative forecast errors. They also show that the proportion of firm-

quarters with a negative forecast error that end with a positive or zero earnings surprise is

significantly higher than the proportion of cases with a positive or zero forecast error that

end with a negative earnings surprise. These results indicate that analysts forecasts are

dampened so as to increase the likelihood that the actual reported earnings will exceed or

at least match analysts forecasts of earnings upon the earnings announcement.

Finally, BGH also document that a market premium to MBE, although somewhat

smaller, exists in the cases where MBE is likely to have been achieved through either

earnings or expectations management. Their finding also indicates that the premium to

MBE is a leading indicator of future performance. This premium and its predictive ability

are only marginally affected by whether the MBE is genuine or the result of earnings or

expectations management.

There is no study so far investigating whether a market premium to MBE exists in the

UK. Given a significant market premium to MBE in the US, it is interesting to see

whether it exits outside the US. Although the UK market is somewhat similar to its US

counterpart, it is widely believed that differences in business culture, institutional factors,

market structure, investors behavior between these two countries may lead to different

empirical finding. For example, US companies are active players of managing analysts

earnings expectation (McGee, 1997; Vickers, 1999) because they might be sued if theyhave unfavorable earnings surprises. In the UK, it is very rare that investors sue their

investing companies due to unfavorable earnings surprise. In addition, previous studies

have not found the reasons for the market premium to MBE. For example, BGH find that


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This study examines the following four research questions in relation to the market

premium to MBE in the UK.

(1)What is the recurrence of MBE?

(2) Is there a market premium to MBE?

(3) If there is a market premium to MBE, then whether the premium to meet earnings

expectations is different from the premium to beat earnings expectations.

(4)Do UK investors assign higher weight for earnings surprises than forecast

revisions or forecast errors as their US counterparts?

Using a large UK sample during1990-2003, we find the proportion of UK firms that

MBE is higher than those firms that fail to do so, although the proportion of former firmsslightly declined during 2000-2001. Unlike US evidence, we find only a very small

proportion of UK firms that have their reported earnings on target (around 4% of the total

examined firms), indicating that there might be a fundamental difference in market

expectations from investors between these two countries. We find UK firms also enjoy a

market premium to MBE especially for firms with positive forecast revisions (the latest

forecasted earnings before current year earnings announcement minus the earliest

forecasted earnings after prior year earnings announcements) and positive forecast errors

(actual earnings minus the earliest forecasted earnings after prior year earnings

announcements).The premium to beat expectations is higher than the premium to meet

earnings expectation. We also find some evidence that the premium to beat earnings

expectations is marginally higher than the penalty to miss earnings expectations.

Consistent with US evidence, the relative frequency of negative earnings surprises is

smaller than the relative frequency of negative forecast errors. In addition, the proportion

of negative forecast error cases that end with a zero or positive surprise is greater than the


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significant factor in explaining the abnormal returns in comparison with the effect of

earnings surprises. This suggests UK investors do not simply fixate on earnings surprises.

The paper is organized as follows. The next presents the empirical design and prediction.

Section 3 describes sample selection criteria and data collection. Results are reported in

Section 4. The final section concludes with a short summary.

2. Research method and prediction

This study closely follows the research design used by BGH. The abnormal return is

derived from the market adjusted method instead of the market model to simplify our

empirical tests. We first use both descriptive and univariate analyses to investigate

whether abnormal share return is correlated with MBE, forecast revisions, and forecast

errors. The main empirical results are derived from the following OLS regression model

suggested by BGH, shown as follows.

Model 1a:

++++++= itit5it4it3it2it10it DMBE*SURPDBEATDMBESURPERRORCAR

Where

CARit: Cumulative market adjusted share return for company i for the following periods:

a. Event period 1: a 12 month event period ending 4 months after the financial

d


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d. Event period 4: the event period starting the day after prior year earnings

announcements and ending the day after current year earnings

announcements. This is the test period used by BHG (2002).

e. Event period 5: the event period between interim and final earnings

announcement dates

f. Event period 6: the event period starting the day after the financial year end

date and ending the day after the final earnings announcements.

We find the results using the above six different test periods have provided qualitatively

consistent conclusion, and therefore only reports the results using the event periods 1 and

4 for simplicity reason.

ERRORit: forecast errors, the difference between actual reported earnings and the earliest

forecasted earnings made soon after prior year earnings announcements, deflated by prior

year end share price.

SURPit: earnings surprise, the difference between actual reported earnings and the latest

forecasted earnings made soon before current year earnings announcements, deflated by

prior year end share price.

DMBEit: a dummy variable for firms that MBE. It equals 1 if SURP it 0, 0 otherwise

DBEATit: a dummy variable for firms that beat earnings expectations. It equals 1 ifSURPit > 0, 0 otherwise.

We also obtain the following model after replacing forecast errors with earnings surprises


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Model 1b:

++++++= itit5it4it3it2it10it DMBE*SURPDBEATDMBEREVISIONSURPCAR

Where

REVISIONit: the latest forecasted earnings soon before current year earnings

announcements minus the earliest forecasted earnings subsequent to prior year earnings

announcements, deflated by prior year end share price. It is true that 1 in model 1a equal

1 plus 2 in model 1b.

If the premium to MBE exists in the UK, then we should observe a positive and

significant 2 and 3 in model 1a (1 and 3 in model 1b). A positive and significant 4

in both models indicate firms who beat earnings expectation have higher market premium

than firms who only meet earnings expectation. We also compare 1 and 2 in both

models to investigate whether the market places a higher weight on forecast errors or

earnings surprise. BGH find that US investors place higher weight on earnings surprises

than forecast errors.

Since the direction of forecast revision of future earnings (DREV) is found to be an

important indicator for expectations management in the BGH paper, this study further

investigates the role of DREV in determining the premium to MBE through the following

modified model:

Model 2:


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DREVit: direction of forecast revision of future earnings. It equals 1 if forecast revision is

positive, 0 otherwise.

3. Sample selection, data, and descriptive analysis

Table 1 summarizes the sample selection criteria. Only industrial firms who are followed

by IBES and have Datastream code are included in this study. There are 14,756 firm

years during 1990-2003 that meet these criteria. After deleting firms with less than two

earnings forecasts and deleting extreme1 share returns, forecast revisions, and forecast

errors in each test period, only 13,684, 13,497, 12,776, 6,497, 7,569, and 8,208 firm years

are left for the test periods 1-6, respectively. The test period 4 has much smaller number

of observations than the test period 1 because the latter period requires actual earnings

announcement dates. Market adjusted share returns are the difference between firm share

return and market return, both were obtained from Datastream. Forecasted earnings and

actual earnings from the IBES database are used to construct forecast revisions, forecast

errors, and earnings surprises.

Table 2 reports the results of descriptive analysis. Panel A shows that both forecast errors

and forecast revisions have negative mean, consistent with previous studies in the sense

that analysts forecasted earnings are generally optimistic. Median forecast errors and

revisions for the six test periods appear to be inconsistent. Both median forecast errorsand revisions for the test periods 1, 4, and 5 are negative. Both event periods 1 and 4

include the forecasted earnings that were made early in the year, which produce relatively

higher negative forecast errors than other event periods. This indicates that forecasted


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reported in panel B. Market adjusted returns for the six test periods appear to be

inconsistent. Events 1, 4, and 5 have negative mean and median abnormal share returns.

Panel B reports the frequency of firms who meet, beat, or miss analysts forecasts. We

find that on average 54% of UK firms during 1990-2003 meet analysts forecasts and only

4% of firms have actual earnings on target. In contrast, 42% of UK firms during the same

period failed to meet or beat earnings expectations. Using the binary test, we find the

difference in frequency between firms that MBE and firms that miss earnings expectation

is significant at the 1% level. The above finding is robust across different test periods

and generally consistent with US evidence. BGH documents that around 40% of US

firms failed to MBE during the 1983-1997 period.

4. Empirical results

Table 3 reports univariate analyses over the association between abnormal share returns,

forecast errors, forecast revisions, and earnings surprises. Panel A suggests that the

average market adjusted return is consistently higher (between 5.5% and 17.1%) when

UK firms beat instead of missing analysts forecasts. In addition, the average market

adjusted return is consistently higher (between 5.2% and 12.2%) when UK firms beat

instead of meeting analysts forecasts. Finally, firms that meet earnings expectations have

consistently higher average abnormal share returns (between 1% and 6.2%) than firms

that fail to do so. Consistent with US evidence, this finding indicates that a market

premium to MBE indeed exists in the UK. Panel B shows that firms with upward forecast

revisions (17.5% and 15.8% respectively) enjoy much higher average abnormal share

returns than firms with downward revisions (-10%and -10 8% respectively) and zero


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negative (i.e. optimistic forecasted earnings, -11.5% and -12.9% respectively) or zero

forecast errors (between -2.7% and -6.6%). This finding suggests that the market does

rewards firms that beat earnings expectation and have positive forecast revisions or

positive forecast errors (i.e. pessimistic forecasted earnings).

Panel D reports the correlations between abnormal share returns, forecast revisions, and

MBE. It shows that firms who have positive forecast revisions and beat analysts forecasts

enjoy the highest average abnormal returns (21% and 19.6% respectively) across the two

test periods. However, firms who have negative forecast revisions and miss analysts

forecasts appear to have the worst average abnormal share returns (-16.6% for both test

periods). Firms who have zero forecast revisions but beat analysts forecasts appear to

have second highest average abnormal share returns (12.7% and 13.6%). In addition,

firms who have positive forecast revisions but meet analyst forecasts also appear to have

positive and relatively high average abnormal share return (15.9% and 6.2%). Again the

above findings are consistent with our previous findings in the sense that firms that have

upward forecast revisions and beat analysts forecasts are rewarded with an economically

significant market premium.

Panel E reports the correlations between abnormal share returns, forecast errors, and

MBE. The results are less clear cut. We find firms that have positive forecast errors

(pessimistic forecasts) and beat analyst forecasts have highest average abnormal returns

16.6% and 16.4% respectively). On the other hand, firms that have negative forecast

errors (optimistic forecasts) and miss analysts forecasts have lowest median abnormalreturns (-16.3% and -16.6% respectively).

Finally we investigate firm abnormal share returns conditional on forecast errors, forecast


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both periods (-16.6%). Untabulated results show that firms that have zero forecast errors

and upward forecast revisions but miss analyst forecasts have the highest mean abnormal

share returns in periods 2, 3, and 6 (between 6.6% and 11.8%).

In summary, the panels in Table 3 have provided evidence suggesting that firms that have

upward forecast revisions, positive forecast errors ( pessimistic forecasts), and beat

analysts forecasts have higher abnormal returns than firms that have downward forecast

revisions, negative forecast errors, and miss analyst forecasts. In addition, firms that have

upward forecast revisions, positive forecast errors, and meet analyst forecast generally

have higher (lower) abnormal share return than their counterparts that miss (beat)

earnings expectations. We observe a market premium for firms that beat or meet earnings

expectations although the magnitude of the premium is conditional on the sign of forecast

errors and forecast revisions.

To confirm the above findings, we report the results using the OLS regressions in Table

4. Panel A shows that using the model 1, the slope coefficient of forecast errors (i.e. 2),

measured by the difference between actual earnings and the earliest forecasted earnings

subsequent to prior year earnings announcement, is consistently positive and significant

at the 1% level across the two test periods. Firms that have positive forecast errors appear

to have a market premium ranging between 2% and 2.3%, which is much smaller than the

finding of 40.7% by BGH. This finding could be caused by two reasons. First, our study

uses market adjusted return instead of the return from the market model. Second, we use

annual instead of quarterly data. Future research may consider using returns from themarket model. Unlike the finding documented by BGH, the slope coefficient of earnings

surprises (1) are consistently negative and significant at the 1% level. Untabulated result

shows that the coefficient of regressing CAR on earnings surprise alone is positive, but


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our study than BGH. The slope coefficients of MBE dummy (i.e. 3) are consistently

positive but insignificant for the test periods 1 and 4. However it is statistically

significant at around the 5% when using the test periods 2 and 3. It shows that firms that

MBE have market premium of 2.1 or 2.4%. This is rather consistent with the finding by

BGH that the market premium is 2.3% after controlling for forecast errors. The slope

coefficients of beat dummy (4) are consistently positive and significant at the 1% level.

This indicates that firms that beat earnings expectations enjoy very high market premium

(7.7% and 10.2% respectively). BGH finds a market premium of 3.4% for firms that beat

earnings expectations. The coefficient of the interaction between earnings surprise and

firms that either meet or beat earnings expectation is positive but marginally significant

only when the test period 4 is used. The premium to beat earnings expectations appear to

be marginally higher (0.5%) than the penalty to miss earnings expectations. This is much

smaller than the finding of 43.4% by BGH.

After replacing forecast errors with forecast revisions and earnings surprises, the slope

coefficient of earnings surprises becomes consistently positive and significant at the 1%

level. The market premium to earnings surprises is only around 0.6%, so much smaller

than the finding of 94.1% by BGH. Same to forecast errors, the slope coefficients of

forecast revisions are consistently positive and significant at the 1% level. The size of the

slope coefficient of forecast revisions is, however, at least three times higher than that of

the slope coefficient of earnings surprises. This is somewhat different from the finding of

BGH in the US that earnings surprise has twice higher slope coefficient than forecast

errors and revisions. UK investors appear to value forecast revisions more than earningssurprises. Unlike US evidence, UK investors do not appear to fixate on earnings

surprises.


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results after considering the direction of forecast revision and separate dummies for firms

that beat or meet analyst forecasts. We find forecast revisions and earnings surprises are

consistently positive and significant at the 1% level. The slope coefficient of forecast

revisions is at least twice higher than that of earnings surprises. Dummy for firms that

beat analyst forecasts is consistently positive and significant at the 1% level; dummy for

firms who meet analyst forecast is only insignificant when using the event periods 1 and

4 (but is significant at the 10% level when using the event periods 2 and 3). Upward

forecast revisions appear to have very high slope coefficients when using the event

periods 1 and 4. Again the interaction between earnings surprises and firms that MBE is

positive and significant only when using the event period 4. There is some evidence that

the premium to beat earnings expectations (0.7%) is higher than the penalty to miss

earnings expectations.

In summary, table 4 suggests that unlike US evidence earnings surprises do not appear to

as important as forecast revisions in explaining abnormal share returns. Earnings

surprises appear to have positive and significant explanatory power for abnormal share

return only after controlling for forecast revisions. This result indicates that UK investors

are able to differentiate the information contained in forecast revisions and earnings

surprises. Different from the US counterparts, UK investors do not appear to fixate on

earnings figures. We also find that firms that MBE enjoy higher abnormal share returns

than firms that miss. In addition, UK firms that beat earnings expectations enjoy higher

abnormal share returns than firms that only meet their targets. There is some evidence

that the premium to beat earnings expectations is higher than the penalty to miss earningsexpectations when the abnormal share returns are calculated for the period between the

day after prior year earnings announcements and the day after current year earnings

announcement. This test period is consistent with the one used by BGH except that we


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earning surprises; the slope coefficient of upward (or positive) forecast revisions is at

least eight times higher than that of forecast revisions.

5. Summary and conclusion

This paper investigates whether UK firms that meet or beat analysts forecasts enjoy a

market premium and whether firms that beat earnings expectations have a higher market

premium than firms that meet them. Consistent with the US evidence, we find very

similar magnitude of the market premium for firms that meet or beat analysts forecasts

(i.e. 2.1% or 2.4% in the UK in comparison with 2.3% in the US). In addition, UK firms

that beat earnings expectations have a higher market premium than firms that meet

earnings expectations. The magnitude of the market premium due to beating earnings

expectations in the UK (7.7% or 10.2%) is much higher than that in the US (3.4%).However, the market premium to beat earnings expectations appears to be higher (0.7%)

than the penalty to miss earnings expectations, although the magnitude of the market

premium is much smaller than the US finding of 43.4% (BGH 2002). Finally, unlike the

finding in the US we find UK investors place a much higher weight on forecast revisions

than earnings surprises when valuing their investing firms, indicating that they do not

fixate on earnings surprises.

Kasznik and McNichols (2002) document a valuation premium to MBE that is associated

with future profitability although the above premium is not actually captured by analysts

forecasts of future earnings. Analysts appear to have ignored the information contained in

the market premium to MBE about a firms future operating performance. BGH also find

that the market premium to MBE is a leading indicator of firm future operating

performance. Both studies do not investigate the underlying reasons for the observed

market premium Our results suggest that although the market premium to MBE indeed


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reflect the information contained in the market premium into their forecasts of future

earnings. Both are important issues to further understand the nature of and the reasons for

the market premium to MBE under different reporting settings, which have been largely

ignored in the literature.


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References:

Abarbanell, J. and Leahvy, R. 2003. Biased forecasts or biased earnings? The role of

reported earnings in explaining apparent bias and over/underreaction in analysts earnings

forecasts.Journal of Accounting and Economics 35: 105-146.

Brown, L.D., 2001. A temporal analysis of earnings surprises: profits versus losses.

Journal of Accounting Research, 39 (2): 221241.

Bartov, E., Givoly, D., and Hayn, C., 2002, The rewards to meet or beat earnings

expectation,Journal of Accounting and Economics 33: 173204

Burgstahler, D. and Eames,M.J., 2003. Earnings management to avoid losses and

earnings decreases: Are analysts fooled? Contemporary Accounting Research 20(2): 253-

294.

Francis, J., Philbrick, D., Schipper, K., 1994. Shareholder litigation and corporate

disclosures.Journal of Accounting Research 32 (2): 137164.

Kasznik, R., 1999. On the association between voluntary disclosures and earnings

management.Journal of Accounting Research 37: 57-82.

Kasznik, R., Lev, B., 1995. To warn or not warn: management disclosures in the face of

an earnings surprise. The Accounting Review 70 (1): 113134.

Kasznik, R. and McNichols, M., 2002. Does meeting earnings expectations matter?

Evidence from analyst forecast revisions and share prices.Journal of Accounting

Research 40(3): 727-759.

Lopez, T.J. and Rees, L., 2002. The effect of beating and missing analysts forecasts in

the information content of unexpected earnings.Journal of Accounting, Auditing and

Finance 17(2): 155-184.

Matsumoto, D.A., 2002. Managers incentives to avoid negative earnings surprises. The

Accounting Review 77(3): 483-514.


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Skinner, D.J., 1997. Earnings disclosures and stockholder lawsuits.Journal of

Accounting and Economics 23 (3): 249282.

Soffer, L.C., Thiagarajan, S.R., Walther, B.R., 2000. Earnings preannouncement

strategies.Review of Accounting Studies 5 (1): 526.

Vickers, M., 1999. Ho-hum, another earnings surprise.Business WeekM3630: 8384.


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Table 1: Sample Selection

Event 1 Event 2 Event 3 Event 4 Event 5 Event 6

All UK firm-years from 1990 to 2003 in IBESsummary file where one-year ahead consensusEPS forecasts and EPS actuals are available

15165Less: Datastream code is not available 409

Merged set with Datastream code 14756

Less: Firm-years with only one forecast 206

Firm-years with at least two forecasts 14550

Firm-years with at least two forecasts within aspecific event period 14456 14024 13249 6690 7792 8448

Less: Datastream returns are not available 406 162 114 14 17 15

Merged set with Datastream returns data 14050 13862 13135 6676 7775 8433

Less: Firm-years with extrem outliers onforecast error, forecast revision, earningssurprise or market adjusted returns 366 365 359 179 206 225

Firm-years for data analysis 13684 13497 12776 6497 7569 8208

Note:1) Event 1, 2 and 3 are, respectivly, a fixed 12-month, 6-month and 4-month period until 4 months after the fiscal year

end. Event 4, 5 and 6 are, respectively, an event period from the previous annual earnings announcement date (AED) tothe current annual AED, from the current interim AED to the current annual AED, from the current fiscal year end tothe current annual AED.2) Datastream market returns are market adjusted buy-and-hold period returns.


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Table 2: Descriptive Statistics

Panel A: Forecast error, forecast revision, earnings surprise and returns

Event 1 (N = 13684) Event 4 (N = 6497)

Mean Median Std Mean Median Std

Error -2.313 -0.453 8.009 -1.830 -0.290 7.219

Revision -1.774 -0.320 5.165 -1.458 -0.240 4.843

Surprise -0.539 0.092 5.602 -0.373 0.165 4.942

Returns -0.001 -0.040 0.443 -0.001 -0.042 0.427

Panel B: Meeting or beating earnings forecasts (%)

Event 1 Event 4

N Beat % Meet % Fail % MBE % MBE %1990 826 372 0.45 82 0.10 372 0.45 0.55 -

1991 848 416 0.49 77 0.09 355 0.42 0.58 1.00*

1992 895 437 0.49 101 0.11 357 0.40 0.60 1.00*

1993 918 496 0.54 62 0.07 360 0.39 0.61 0.60

1994 975 581 0.60 44 0.05 350 0.36 0.64 0.641995 1027 593 0.58 38 0.04 396 0.39 0.61 0.631996 1104 655 0.59 45 0.04 404 0.37 0.63 0.661997 1222 773 0.63 23 0.02 426 0.35 0.65 0.681998 1218 709 0.58 37 0.03 472 0.39 0.61 0.631999 1110 651 0.59 21 0.02 438 0.39 0.61 0.622000 1041 516 0.50 10 0.01 515 0.49 0.51 0.522001 920 377 0.41 5 0.01 538 0.58 0.42 0.402002 789 386 0.49 3 0.00 400 0.51 0.49 0.50

2003 791 463 0.59 2 0.00 326 0.41 0.59 0.57Total 13684 7425 0.54 550 0.04 5709 0.42 0.58 0.59

Note: * only one beating case exists.


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Table 3: Returns by MBE, forecast revision and forecast error

Panel A: Returns by MBE

Event 1 (N = 13684) Event 4 (N = 6497)

N Mean Median N Mean Median

Beat 7425 0.075 0.029 3726 0.069 0.024

Meet 550 -0.034 -0.060 137 -0.053 -0.036Fail 5709 -0.096 -0.131 2634 -0.097 -0.131

Panel B: Returns by forecast revision

Event 1 (N = 13684) Event 4 (N = 6497)


Downward

7956

-

0.100 -0.126 3653

-

0.108 -0.142

Same 1536 0.036 -0.020 484 0.028 -0.028Upward 4192 0.175 0.113 2360 0.158 0.093

Panel C: Returns by forecast error

Event 1 (N = 13684) Event 4 (N = 6497)


Optimistic

7966

-

0.115 -0.146 3545

-

0.129 -0.161

Zero

126

-

0.027 -0.064 62

-

0.066 -0.109

Pessimistic 5592 0.163 0.098 2890 0.157 0.094


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Panel D: Returns by forecast revision and MBE

Event 1 (N = 13684) Event 4 (N = 6497)


D B

3849

-

0.034 -0.062 1851

-

0.053 -0.093

M

338

-

0.129 -0.140 70

-

0.134 -0.151

F

3769

-

0.166 -0.197 1732

-

0.166 -0.201

S B 760 0.127 0.049 222 0.136 0.072

M

37

-

0.073 -0.078 10

-

0.144 -0.069

F

739

-

0.052 -0.117 252

-

0.059 -0.104

U B 2816 0.210 0.136 1653 0.196 0.122M 175 0.159 0.104 57 0.062 0.058F 1201 0.096 0.056 650 0.071 0.004

Panel E: Returns by forecast error and MBE

Event 1 (N = 13684) Event 4 (N = 6497)


O B

2562

-

0.092 -0.121 1217

-

0.122 -0.148

M

338

-

0.129 -0.140 70

-

0.134 -0.151

F

5066

-

0.126 -0.163 2258

-

0.133 -0.166Z B

54

-

0.084 -0.163 35

-

0.033 -0.110

M

37

-

0.073 -0.078 10

-

0.144 -0.069

F

35 0.109 0.133 17

-

0.087 -0.120

P B 4809 0.166 0.099 2474 0.164 0.101


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23

M 175 0.159 0.104 57 0.062 0.058F 608 0.139 0.092 359 0.127 0.055


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Panel F: Returns by forecast error, forecast revision and MBE

Event 1 (N = 13684) Event 4 (N = 6497)


O D B

2562

-

0.092 -0.121 1217

-

0.122 -0.148

M

338

-

0.129 -0.140 70

-

0.134 -0.151

F

3769

-

0.166 -0.197 1732

-

0.166 -0.201

S F739

-

0.052 -0.117 252

-

0.059 -0.104

U F 558 0.047 -0.025 274 0.009 -0.052

Z D B

54

-

0.084 -0.163 35

-

0.033 -0.110

S M

37

-

0.073 -0.078 10

-

0.144 -0.069

U F

35 0.109 0.133 17

-

0.087 -0.120

P D B 1233 0.091 0.041 599 0.086 0.042S B 760 0.127 0.049 222 0.136 0.072U B 2816 0.210 0.136 1653 0.196 0.122

M 175 0.159 0.104 57 0.062 0.058F 608 0.139 0.092 359 0.127 0.055

Note:

1) O, Z and P represent optimistic, zero and pessimistic forecast error, respectively. D, S and U represent downward, same and upward forecast revision,

respectively. B, M and F represent beat, meet and fail earnings forecasts, respectively.


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Table 4: Regression Analysis

Panel A: Replication of Bartov et al

DMBESURPDBEATDMBEREVISIONSURP

DMBESURPDBEATDMBEERRORSURPR

*)(

*

5432210

543210

++++++=

+++++=

Event 1 (N = 13684) Event 4 (N = 6497)

coefficient p-value Coefficient p-value

0 -0.021 0.001 -0.027 0.0037

1 -0.013

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