Has Regulation Changed the Market's Reward for Meeting or Beating Expectations?

A firm meets or beats expectations when it reports earnings that are at or above the consensus analysts' forecast. We argue that two types of firms MBE: strong firms who commit to future performance and signal future earnings by MBE, and weak firms who attempt to mimic strong firms by managing either expectations or earnings. Using a sample of 4,152 earnings announcements for firms that habitually MBE between 1999 and 2004, we find that the incidence of expectations (earnings) management decreased following the enactment of Regulation FD (Sarbanes Oxley). In addition, we find that the market reactions to MBE achieved through managing expectations declined significantly following the enactment of Regulation FD, but not to MBE achieved by managing earnings following the enactment of the Sarbanes-Oxley Act.

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