Does the market reward meeting or beating analyst earnings forecasts? Empirical evidence from China

While analyst earnings forecasts are crucial earnings benchmarks in equity valuation, existing studies provide no consensus on whether the market rewards firms for beating analyst earnings expectations. Using a sample of 9,898 firm-year observations from 1,821 unique Chinese listed firms over the period from 2004 to 2019, we document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. We do not find firms using earnings management to meet or just beat analyst forecasts. Overall, we provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market’s over-skepticism of earnings management being a plausible mechanism for this phenomenon