Investor response to zero and small positive earnings surprises

Abstract

Evidence in prior research suggests that firms that manipulate earnings and/or analyst earnings expectations are likely to report earnings that precisely meet or narrowly beat analyst earnings forecasts, resulting in a zero or small positive earnings surprise. Investors, therefore, are likely to be more skeptical of a zero or small positive earnings surprise in their attempt to identify possible manipulators on the earnings announcement date. I find that the ERC is lower for zero and small positive earnings surprises than the ERCs for earnings surprises in adjacent ranges. The result is consistent with investors seeing a zero or small positive earnings surprise in and of itself as an indication that manipulation has occurred. I also find evidence that analysts regard zero or small positive earnings surprises as the results of manipulations, and respond negatively to such earnings surprises.