Meeting and Beating Earnings Expectations in the Pre- and Post Sarbanes-oxley Act Eras: Prevalence and Stock Market Reactions

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The purpose of this paper is to study whether the prevalence of, and stock price premium to, firms meeting and beating analysts’ quarterly earnings expectations has changed in the wake of new legislation, namely the Sarbanes-Oxley Act, which set forth stricter rules for companies’ accounting arguably limiting earnings management. We study earnings surprises of S&P 500 companies and find that whereas the overall MBE frequency has continued to increase slightly, the levels of the constituents of MBE have changed. The prevalence of beating expectations has increased significantly whereas the prevalence of meeting expectations has decreased. Furthermore, we find that the premium to MBE has decreased. The premium to beating has decreased and the stock market reaction to meeting expectations has decreased ...