I show that median earnings surprise has shifted rightward from small negative (miss analyst estimates by a small amount) to zero (meet analyst estimates exactly) to small positive (beat analyst estimates by a small amount) during the 16 years, 1984 to 1999. I show that a rightward temporal shift in median surprise from negative to positive describes earnings, but neither profits nor losses. Median profit surprise shifts within the positive quadrant, from zero to one cent per share. Median loss surprise shifts within the negative quadrant from extreme negative (about ‐33 cents per share) to zero. I show that the median surprise for profits exceeds that for losses in every year. I document significant positive temporal trends in both meet and beat analyst estimates for both profits and losses, but I find a greater frequency of profits that either meet or beat analyst estimates in every year. I find a significant positive temporal trend in positive profits that are “a little bit of good news,” and a significant negative temporal trend in managers who report losses that are an “extreme amount of bad news.” My results are robust to the four internal validity threats I consider—namely temporal changes in: (1) analyst forecast accuracy, (2) the mix of earnings of one sign preceded by earnings of another sign four quarters ago, (3) the timeliness of the most recent analyst forecast, and (4) the I/B/E/S definition of actual earnings. I find that managers of growth firms are relatively more likely than managers of value firms to report good news profits. I show that when they do report positive profit surprises, managers of growth firms are more likely to report “a little bit of good news” in every year.

Accounting changes, Analyst forecasts, Forecast accuracy, Earnings announcement

Managers play earnings surprise games to avoid negative earnings surprises by managing earnings upward or by managing analysts' earnings expectations downward. We investigate the effectiveness of the financial reporting process at restraining earnings surprise games. Because the annual reporting process is subject to an independent audit and more rigorous expense recognition rules than interim reporting, it provides managers with fewer opportunities to manage earnings upward. We document that, relative to interim reporting, annual reporting reduces the likelihood of income‐increasing earnings management and, to a lesser extent, of negative surprise avoidance, but increases the magnitude of downward expectations management. Our findings suggest that regulatory attempts to monitor corporations' internal checks and balances are likely to be more effective at curbing upward earnings management than at mitigating negative surprise avoidance.

Accounting research, Citations, Contemporary accounting research

Analysts forecasts, Interim reporting, Time-series, Analyst forecast revisions

Lawrence D. Brown, Michael S. Rozeff, Univariate Time-Series Models of Quarterly Accounting Earnings per Share: A Proposed Model, Journal of Accounting Research, Vol. 17, No. 1 (Spring, 1979), pp. 179-189

Lawrence D. Brown, Jerry C. Y. Han, Do Stock Prices Fully Reflect the Implications of Current Earnings for Future Earnings for AR1 Firms?, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 149-164

Lawrence D. Brown, Gordon D. Richardson, Steven J. Schwager, An Information Interpretation of Financial Analyst Superiority in Forecasting Earnings, Journal of Accounting Research, Vol. 25, No. 1 (Spring, 1987), pp. 49-67

Analyst forecasts, Analyst forecast consensus, Market association, Timely aggregate analyst forecasts

Lawrence D. Brown, John S. Hughes, Michael S. Rozeff, James H. Vanderweide, Expectations Data and the Predictive Value of Interim Reporting: A Comment, Journal of Accounting Research, Vol. 18, No. 1 (Spring, 1980), pp. 278-288