THE MOST SUCCESSFUL FAILURES: CHARACTERISTICS OF FIRMS WHICH JUST MISS THE CONSENSUS ANALYSTS’ EARNINGS FORECAST

Abstract

Firms which have pre-managed earnings just below the consensus analysts’ earnings forecast may engage in accounting earnings management to meet or narrowly beat this simple earnings benchmark. However, there are still firms which miss this earnings benchmark by a narrow margin. This study aims to investigate how conservatism, external audit quality and leverage affect the likelihood of firms narrowly missing, meeting and narrowly beating the analysts’ forecast. Applying binary logistic regression on an extensive sample comprising 25,201 firm-years covering an 8-year period from 2002 to 2009, this study is able to find that firms which narrowly miss the analysts’ forecast have lower level of conservatism than firms which meet or just beat the analysts’ forecast. The study also finds that external audit quality has some weak power in explaining the likelihood of narrowly missing the analysts’ forecast. However, no significant evidence is found to support the effect of leverage on firms’ likelihood of narrowly missing the analysts’ forecast.