Expectations Management and Stock Returns
Review of Financial Studies [33(10): 4580–4626 (October 2020)]
61 Pages Posted: 9 Nov 2016 Last revised: 28 Dec 2020
Date Written: October 10, 2019
We establish a link between firms managing investors' performance expectations, earnings announcement premia, and cyclical patterns (i.e., seasonalities) in returns. Firms that are more likely to manage expectations toward beatable levels predictably earn lower returns before, and higher returns during, their earnings announcements. This pattern repeats across firms' fiscal quarters suggesting firms manufacture positive "surprises" by negatively biasing investors' expectations ahead of announcing earnings. We corroborate these findings using non-price-based outcomes indicative of expectations management. Together, our findings are consistent with the pressure for firms to meet earnings targets shaping the cross-section of firms' stock returns.
Keywords: Returns, Anomalies, Expectations Management, Seasonalities, Announcement Premia
JEL Classification: G10, G11, G12, G14, M40, M41
Suggested Citation: Suggested Citation