“Valuation Implications of Negative Earnings Surprises: Evidence from Analyst Research Reports” by Professor Stephen Young (Management School? Lancaster University)

We seek evidence on causes of investors’ response to negative earnings surprises (NES) by examining the content of sell-side equity analysts’ research reports published in response to quarterly earnings shortfalls. We test the degree to which attributional search triggered by NES leads analysts to revise their assumptions about performance prospects and management quality. A significant increase in analyst negativity concerning both dimensions is apparent during the three-day window after NES are announced, consistent with capital market penalties associated with NES reflecting the combined effect of downward revision in expected cash flows and upward revision in the discount rate due to increased information risk. Positive management guidance released concurrent with NES moderates analyst negativity about firms’ longer-term performance prospects. In contrast, analysts revise their perceptions of management quality downward irrespective of whether or not NES are accompanied by positive guidance.

For more information, please contact Dr Teerooven Soobaroyen (t.soobaroyen@soton.ac.uk)