The market's reaction to unexpected earnings thresholds

Don Herrmann, Ole Kristian Hope, Jeff L. Payne, Wayne B. Thomas

Research output: Contribution to journalArticlepeer-review

20 Scopus citations


We examine differences in quarterly earnings announcement returns as a function of meeting or missing each of three earnings thresholds - reporting a profit, reporting an increase in earnings, and meeting analysts' forecasts. In contrast to prior research, the research design identifies the incremental market reaction to the profit and earnings increase thresholds, after controlling for the effect of meeting or missing analysts' forecasts. Using this methodology, we find little evidence of incremental threshold effects beyond meeting analyst forecasts. In other words, zero earnings and a zero change in earnings do not appear to be 'special' points that elicit a differential response by investors. Our results are robust to including a number of control variables and alternative tests. The fact that we find little evidence to support market-related incentives to manage earnings at the profit and earnings increase thresholds suggests either that managers have other incentives to manage earnings at these thresholds or that managers perceive market rewards and penalties when none exist.

Original languageEnglish
Pages (from-to)34-57
Number of pages24
JournalJournal of Business Finance and Accounting
Issue number1-2
StatePublished - Jan 2011


  • Analyst Forecasts
  • Earnings Thresholds
  • Market Reaction

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance


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