The market effects of breaking a string of meeting or beating analysts' expectations: Downward revision of future cash flows or increase in cost of equity capital?

摘要

This paper parses the negative market reaction to breaking a string of consecutively meeting or beating analysts' expectations (hereafter MBE). Using a set of firms that break a string of MBE relative to a pair-matched control set of firms that do not, I show that on average, breaking a string of MBE is associated with both decreases in expected future cash flows and increases in firms' cost of equity capital. Depending on the number of quarters that firms consecutively MBE before a break, cost of equity capital increases between 1.1% and 1.5% over a three-month period across the break. I also show that breaks by firms with higher prior information risk are associated with more negative abnormal returns and larger increases in cost of equity capital, but not larger decreases in expected future cash flows. Overall, my evidence suggests that breaking a string of MBE increases the perceived uncertainty of firms' future cash flows and investors' required rate of return. This finding provides new insights into firms' motivation to MBE. Since a higher cost of equity capital has the potential to impact firms' investment opportunity set and optimal capital structure, the cost of capital impact of breaking a string of MBE represents a significant penalty for missing analysts' expectations.