Does Just-Meeting or Just-Missing of Quarterly Earnings Thresholds Matter?

This paper examines the market reactions to just-meeting/just-missing of the three quarterly earnings thresholds, i.e., avoiding losses, earnings decreases, and negative earnings surprises, both within and across the thresholds. Unlike prior research using the earnings response coefficients (ERC) as an indirect measure of valuation consequences to meeting/missing quarterly earnings thresholds, this study adopts cumulative abnormal returns (CAR) as a direct measure instead. For the just-meeting cases, the market rewards most to avoiding earnings decreases, followed by negative earnings surprises and then losses, nonetheless the difference in CARs between avoiding earnings decreases and negative earnings surprises is not significantly different from zero. Interestingly, the CAR for just reporting profits is significantly negative; indicating that even managers are striving to avoid reporting losses but the market still punishes them. For the just-missing cases, the market punishes most to reporting negative earnings surprises, followed by losses and earnings decreases, however, the differences in CARs among them are not significantly different from zero. Putting together, the premium for just-meeting over just-missing cases of avoiding negative earnings surprises is 1.12%, followed by earnings decreases 0.74%, and losses -0.13%.