Expectations Management and Stock Returns

We show that proxies for firms’ incentives to manage earnings expectations toward beatable levels contain strong predictive power for earnings announcement returns. Firms with stronger incentives to manage expectations predictably outperform firms with weaker incentives by approximately 1% in their expected announcement months. We validate our proxies by showing that firms with stronger incentives display several intuitive patterns; they are more likely to beat analysts’ forecasts even when earnings decline, more often narrowly beat expectations than narrowly miss, and issue low-ball earnings guidance. Collectively, our results suggest firms predictably influence investors’ expectations to manufacture positive “surprises” in high attention periods and thus that expectations management is important for understanding earnings announcement premia, return seasonalities, and the role of investor attention.