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The Market Effects of Breaking a String of Meeting or Beating Analysts’ Expectations: Downward Revision of Future Cash Flows or Increase in Cost of Equity Capital?

Authors

  • Yuan Xie

    1. The author is from Fordham University. He is indebted to Christine Botosan for her continuous encouragement and guidance. He is grateful for the comments and suggestions of Andrew W. Stark (editor), an anonymous referee, Jeffrey Doyle, John (Xuefeng) Jiang, David Kiefer, Karl Lins, Marlene Plumlee and Stanley Veliotis.
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Address for correspondence: Yuan Xie, Fordham University, 441E Fordham Road, Bronx, NY 10458, USA.
e-mail: yxie@fordham.edu

Abstract

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.

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