Conference paper
The Consensus-Beating Game
SSRN
EFA 2003 Annual Conference Paper No. 399
03/01/2003
DOI: 10.2139/ssrn.385600
Abstract
This paper unveils the rationality behind the widely criticized practice of consensus-beating, where companies try to report quarterly earnings equal to or slightly exceeding analysts expectations. In a simple theoretical model we show that a high-growth company can use active earnings guidance and consensus-beating to credibly signal its growth potential to the financial market. We find empirical evidence in support of the model. Consensus-beating companies experience higher subsequent earnings. Earnings forecasts on those companies are less biased and more accurate. The market valuation is higher for consensus-beating stocks. All the above effects are most pronounced among stocks with high price-to-book ratio, a proxy for market perception of high growth potential. Finally, from 1985 to 2000, consensus-beating growth stocks significantly outperform value stocks and consensus-missing growth stocks in returns. The evidence runs contrary to the claim that stock market reacts to an uninformative event. Rather, it takes investors some time to sort out the information from a sophisticated game
Details
- Title: Subtitle
- The Consensus-Beating Game
- Creators
- Tong Yao - University of IowaMark H Liu - University of Kentucky
- Resource Type
- Conference paper
- Conference
- EFA 2003 Annual Conference Paper No. 399
- Publisher
- SSRN
- DOI
- 10.2139/ssrn.385600
- Number of pages
- 53 pages
- Language
- English
- Date published
- 03/01/2003
- Date updated
- 06/10/2011
- Academic Unit
- Finance
- Record Identifier
- 9984380650402771
Metrics
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