Price momentum and the premium for meeting or beating analysts' forecasts of earnings

Christopher T. Edmonds, Jennifer E. Edmonds, Richard Fu and David S. Jenkins

Advances in accounting, 2018, vol. 42, issue C, 34-47

Abstract: This study provides a theoretical rationale and empirical support that relates the existence and magnitude of the premium for meeting/beating analysts' EPS forecasts to the existence of preannouncement price momentum. The study is based on the theoretical work that suggests that extreme levels of price momentum can cause security prices to deviate from fundamental values even in the presence of well-informed and well-financed rational arbitrageurs. Differences of opinion regarding the extent of mispricing and/or optimal exit time to exit the position allow this mispricing to persist (Abreu and Brunnermeir 2002, 2003). To correct mispricing, a news event, like an earnings announcement, is necessary to synchronize investors' exit strategy beliefs (Abreu and Brunnermeir 2002, 2003). In the case of an earnings announcement, this synchronization of beliefs triggers a price reaction of such magnitude that it cannot be explained by unexpected earnings. Instead, we hypothesize and show that the abnormal price reaction is largely captured in what empirical researchers have identified as the meet/beat market premium. Our findings provide a cohesive argument for the temporal variation in meet/beat premiums documented by Koh, Matsumoto and Rajgopal (2008).

Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0882611018301111
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:42:y:2018:i:c:p:34-47

DOI: 10.1016/j.adiac.2018.07.003

Access Statistics for this article

Advances in accounting is currently edited by Dennis Caplan

More articles in Advances in accounting from Elsevier
Bibliographic data for series maintained by Catherine Liu ().