Managment's Incentives To Avoid Negative Earnings Surprises

Managers have strong incentives to avoid negative earings surprises because such surprises generally lead to negative price revisions and overall negative publicity for the firm.Recent articles in th business press suggest that managers of some firms place great importance on meeting or beating analysts' expections(MBE), which they achieve either by using their discretion over over reported earnings to meet expectations(earnings management) or by guiding analysts' earnings forecasts downward to improve their firms' chances of meeting or beating the forecast when earnings are announced(forecast guidance).Managers have two mechanisms for avoiding negative earnings surprise—they can manage earnings upward if unmanaged earnings fall short of expectations or they can guide analysts'expectations downward to avoid overly optimistic forecasts.Both mechanisms entail costs.Recent academic studies find evidence consistent with managers taking actions to avoid negative earning surpries(missing the analysts' forecasts).I test a number of hypothesize about managers' incentives and the probability that the firms meets or beats analysts' forecasts at the earnings announcement.The result suggest that firms with higher institutional ownership,and firms with greater reliance on implicit claims with their stakeholders,and firms with high-growth prospects have greater incentives to avoid missing earning expectations.They are more likely to take actions to avoid negative earnings surprises.In additon,firms are less likely to take acions to avoid negative earnings surprise when uncertainty is high and the firms' total assests is very small.