Does Meeting Earnings Expectations Matter by Kasznik and McNichols - Article Example

In other previous researches, it was proven that share price responds positively when companies meet analysts’ earnings forecast and vice versa, it has however not been discussed whether such response is a result of the firms’ performance on meeting expectation or simply reflects the current earning information. Kaszniko and McNichol (2002) examined whether there is a reward for meeting earnings expectations. Their research found out that: There needs to be control information for the current period of earnings.

Firms that meet earnings expectations were found to receive a higher market valuation than those that failed to meet the expectations. Firms that meet the earnings expectations were found to enjoy an increase in earnings in the future. Analysts' forecasts were not higher for the firms that meet the expectations than for those that don’t. Investors were found to anticipate that there will be higher future earnings for companies that meet expectations, therefore, the increase in valuation for those company`s valuation.

Share prices were higher for those companies that met analyst`s expectations than for those that didn’t. This research suggests that analysts’ future earnings forecasts generally fail to reflect the implications of meeting expectations on future earnings. The increase in value was found to be due to the fact that investors are inclined towards businesses that meet analyst`s expectations. Business underwriters should strive to ensure that they do not increase the valuation of a business after it meets one year`s expectations.