Workshop Series: Mark Soliman
This paper examines the causes and consequences of large positive deviations between expected and realized earnings (earnings surprises). The post-earnings-announcement-drift literature treats earnings surprises as exogenous events that precipitate subsequent stock price drift (Ball, 1978; Bernard and Thomas, 1989; Doyle, Lundholm and Soliman, 2006). However, analyst expectations and earnings realizations are the result of conscious decisions made by analysts and managers. While neither analysts nor managers have an obvious incentive for a large surprise, this phenomenon is regularly observed. Accordingly, in this paper we explore two hypotheses as to why large positive earnings surprises occur: attention-seeking managers and inattentive analysts. While we find evidence consistent with both hypotheses, we find the most support for the manager attention-seeking hypothesis. Further, if managers created the earnings surprise to attract attention, they were successful. Following a large positive earnings surprise, there is a significant increase in analyst following, the percentage of firm shares held by institutional investors, and short and long-term trading volume. Finally, we find ample motivation for these actions including managerial increases in firm ownership prior to the earnings announcement, a lack of managerial earnings guidance, and a strong need for external financing that is fulfilled in the months subsequent to the large positive earnings surprise. Taken together, the evidence is consistent with large positive earnings surprises evolving as a function of economic decisions rather than as random exogenous events.
Associate Professor of Accounting; William A. Fowler Endowed Professor in Business
PhD, University of Michigan 2003; MS, Seattle University, 1999;
BS, California State Polytechnic University, 1993;
CPA, California, 1995
The role of financial information in capital price formation;
Valuation and Fundamental Analysis;
Financial Reporting and Selective Disclosure.
Held At the University of Washington since 2007
Vice-President, Accounting-Based Research, Citadel Investment Group, Chicago (2006-2007)
Assistant Professor, Stanford University (2003 - 2007)
Bond ratings; accounting conservatism; selective disclosure; accounting based trading strategies.
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- "Differential Properties in the Ratings of Certified vs. Non-Certified Bond Rating Agencies," with W. Beaver and C. Shakespeare, Journal of Accounting and Economics, Vol. 42, Issue 3, 2006.
- "The Extreme Future Stock Returns Following I/B/E/S Earnings Surprises," with J. Doyle and R. Lundholm, Journal of Accounting Research, Vol. 44, Issue 5, 2006.
- "The Implications of Firm Growth and Accounting Distortions for Accruals and Profitability," with S. Richardson, R. Sloan, and I. Tuna, The Accounting Review, Vol. 81, Issue 3, 2006.
- "Accrual Reliability, Earnings Persistence and Stock Prices," with S. Richardson, R. Sloan, and I. Tuna, Journal of Accounting and Economics, Vol. 39, Issue 3, 2005.
- "Implied Equity Duration: A New Measure of Equity Security Risk," with P. Dechow and R. Sloan, Review of Accounting Studies, Vol. 9, Issue 2/3, 2004.
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- "Bond Ratings and Accounting Fundamentals," with C. Shakespeare, A. Curtis, and E. DeHaan.