Getting Bad News Out Early: Does it Really Help Stock Prices?

In this paper, we examine the stock price benefit of meeting or beating earnings expectations. Using a general methodology, we find no evidence that the timing of earnings news has any benefit for firms’ stock returns. In fact, in many cases we find firms attempting to engineer positive earnings surprises by beating down expectations only to discover that their efforts are counterproductive. Our results appear to overturn the findings of previous authors who, using less general methodologies, have suggested that firms can boost their stock returns by getting bad news out early. Our results are robust across time periods, for different scaling factors on earnings revisions and surprises, when controlling for firm size and growth prospects, and when conditioned on past earnings news. ∗ We thank Eli Bartov, Mark Carey, Robert Hauswald, Andreas Lehnert, Michel Robe, and the participants at the 2003 Western Finance Association Meetings for helpful comments and suggestions, and Eric Richards for excellent research assistance. This paper represents the views of the authors and does not necessarily represent the views of the Federal Reserve System or members of its staff. Please address correspondence to (Downing): Federal Reserve Board, Mail Stop 89, Washington, DC 20551. Phone: (202) 452-2378. Fax: (202) 728-5887. E-Mail: [email protected]. (Sharpe): Federal Reserve Board, Mail Stop 89, Washington, DC 20551. Phone: (202) 452-2875. Fax: (202) 728-5887. E-Mail: [email protected].