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Keywords:

  • meeting or beating analysts’ expectations;
  • cash flow;
  • uncertainty;
  • cost of equity capital

Abstract:  This paper parses the negative market reaction to breaking a string of consecutively meeting or beating analysts’ expectations (hereafter MBE). Using a set of firms that break a string of MBE relative to a control set of firms that do not, I show that, on average, breaking a string of MBE is associated with both decreases in expectations regarding future cash flows and increases in the cost of equity capital. Depending on the length of the string before a break, increases in the cost of equity capital are between 110 and 150 basis points over a three-month period across the break. Overall, my evidence suggests that breaking a string of MBE increases the perceived uncertainty of firms’ future cash flows and investors’ required rate of return.