Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts






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    • Sanjeev Bhojraj is from the Johnson School of Management, Cornell University. Paul Hribar is from the Tippie College of Business, University of Iowa. Marc Picconi is from the Kelley School of Business, Indiana University. John McInnis is from the McCombs School of Business, University of Texas at Austin. The authors gratefully acknowledge the insightful comments and suggestions made by Cam Harvey (the editor), an associate editor, and an anonymous referee, as well as seminar participants at Cornell University, Columbia University, Duke University, the University of Illinois, the University of Minnesota, the University of North Carolina, the University of Oklahoma, the University of Rochester, and Washington University in St. Louis. The authors thank Thomson Financial Services Inc. for providing earnings per share forecast data, available through the Institutional Brokers Estimate System (I/B/E/S). These data have been provided as part of a broad academic program to encourage earnings expectation research.


This paper examines the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts. We show that firms that just beat analyst forecasts with low quality earnings exhibit a short-term stock price benefit relative to firms that miss forecasts with high quality earnings. This trend, however, reverses over a 3-year horizon. Additionally, firms reducing discretionary expenditures to beat forecasts have significantly greater equity issuances and insider selling in the following year, consistent with managers understanding the myopic nature of their actions. Our results confirm survey evidence suggesting managers engage in myopic behavior to beat benchmarks.