Stock Market Rewards for Earnings that Beat Analyst Earnings Forecasts when the Economy is Unforecastable

Abstract

This study examines whether and why the stock market assigns an incremental premium to the act of beating analyst earnings forecasts when the economy is unforecastable. Our study uses a novel measure of macroeconomic (macro) uncertainty from Jurado et al. (2015) that captures periods during which the real economy is not forecastable and a regression model that controls for the forecast error throughout the quarter. Results show that during high macro uncertainty periods, the market assigns a greater premium to earnings that beat analyst earnings forecasts compared to the premium assigned to these earnings during low macro uncertainty periods. We also report a lower likelihood of managing earnings to beat analyst earnings forecasts during high macro uncertainty periods, suggesting higher accounting information quality. We further show that the incremental premium in high macro uncertainty periods is mainly concentrated within the group of firms that have both low liquidity risk and high accounting information quality. Evidence from our study should be relevant to those interested in understanding the usefulness of earnings during periods of extreme macro uncertainty and forces that determine accounting information quality.