Type of Document	Dissertation
Author	Pinello, Arianna Spina
URN	etd-07012004-140557
Title	Individual Investor Reaction to the Earnings Expectations Path and its Components
Degree	Doctor of Philosophy
Department	Accounting, Department of
Advisory Committee	Advisor Name Title Richard Morton Committee Chair Martin Fennema Committee Member Neil Charness Committee Member Richard Dusenbury Committee Member
Keywords	Firm Valuation Analysts' Forecasts Expectations Management Earnings Expectation Paths Individual Investor Reaction
Date of Defense	2004-06-21
Availability	unrestricted
Abstract The Securities and Exchange Commission and popular press have expressed concern that corporations guide analysts’ forecasts with the purpose of managing earnings surprises and producing desired market reactions. Evidence suggests that firms that guide analysts’ forecasts downward during the period and then beat the latest forecast earn a market premium. Furthermore, alternative paths by which earnings expectations evolve over the reporting period are associated with differential valuation consequences. In an experiment, I explore potential explanations (rooted in judgment effects) for observed market reaction patterns to the earnings expectations path and its components. I conjecture that the presence of uncertainty affects investor reaction to the expectations path in predictable ways. I further examine how investors respond to analyst forecasts and forecast revisions in forming their own earnings expectations. I find that investors are more pessimistic than analysts in their earnings expectations. Further, the divergence between investors’ and analysts’ expectations plays an important role in their reaction. My finding of a premium to beating the latest forecast appears to stem directly from the difference between the investors’ own expectations and the analysts’ consensus forecast. Because investors tend to be more pessimistic than the analysts, they perceive a positive (negative) earnings surprise to be larger (smaller) than reported which explains why investors appear to reward positive earnings surprises more than they penalize negative earnings surprises.
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