The Earnings Numbers Game: The Market Rewards to Walk Down and Penalties to Walk Up of Analysts’ Forecasts.


We provide a comprehensive study of the valuation consequences to meeting/beating analysts’ forecasts (MBE) versus missing expectations conditioned on the forecast revision path prior to the earnings announcement. We find that investors reward firms that walk down forecasts to achieve a positive earnings surprise and penalize firms that walk up forecasts to achieve a negative earnings surprise. The reward and penalty are not justified by subsequent cash flow performance and the post-event return reversal suggests that investors were partially misled by strategic motives belying the forecast revisions. There is higher insider net selling and more new issues for walk down firms, and higher insider net buying and more repurchases for walk up firms. The capital market incentives for selling and MBE reward disappear in recent periods, suggesting that investors learn to discount a walk down. However, the walk up penalty and capital market incentives to depress prices for buying by insiders and the firm remain even in recent years.