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Travis L Johnson, Jinhwan Kim, Eric C So, Expectations Management and Stock Returns, The Review of Financial Studies, Volume 33, Issue 10, October 2020, Pages 4580–4626, https://doi.org/10.1093/rfs/hhz141
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Abstract
We establish a link between firms managing investors’ performance expectations, earnings announcement premiums, 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.
