The paper studies the manner by which earnings expectations are met, measures the rewards to meeting or beating earnings expectations (MBE) formed just prior to the release of quarterly earnings, and tests alternative explanations for this reward. The evidence supports the claims that the MBE phenomenon has become more widespread in recent years and that the pattern by which MBE is obtained is consistent with both earnings management and expectation management. More importantly, the evidence shows that after controlling for the overall earnings performance in the quarter, firms that manage to meet or beat their earnings expectations enjoy an average quarterly return that is higher by almost 3% than their peers that fail to do so. While investors appear to discount MBE cases that are likely to result from expectation or earnings management, the premium in these cases is still significant. Finally, the results are consistent with an economic explanation for the premium placed on earnings surprises, namely that MBE are informative of the firm's future performance.

This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the proportion of firm shares held by institutional investors, a variable used by prior research to proxy for investor sophistication. Our findings show that the institutional holdings variable is negatively correlated with the observed post-announcement abnormal returns. Our findings also show that traditional proxies for transaction costs (i.e., trading volume, stock price) as well as firm size have little incremental power to explain post-announcement abnormal returns when institutional holdings is an explanatory variable. If institutional ownership is a valid proxy for investor sophistication, these findings suggest that the trading activity of unsophisticated investors underlies the predictability of stock returns after earnings announcements. However, tests evaluating the validity of institutional holdings as a proxy for investor sophistication yield only mixed results. This calls for caution in interpreting our findings.

This paper finds that firms that meet or beat current analysts' earnings expectations (MBE) enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations. Further, such a premium to MBE, although somewhat smaller, exists in the cases where MBE is likely to have been achieved through earnings or expectations management. The findings also indicate that the premium to MBE is a leading indicator of future performance. This premium and its predictive ability are only marginally affected by whether the MBE is genuine or the result of earnings or expectations management. r 2002 Elsevier Science B.V. All rights reserved.

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided. IT ISA WIDELY held view that exchange rate movement should affect the value of a firm. Standard economic analysis implies that the profitability and value of most U.S. firms with foreign sales or operations abroad should increase (decrease) with an unexpected depreciation (appreciation) of the dollar as expected foreign currency cash flows translate into larger (smaller) U.S. dollar cash flows. On a more practical level, both financial analysts and firms' managers point to movements in the dollar as responsible for changes in the performance of firms with international activities. For example, executives at Merck and Co. recently claimed that favorable currency rates added one percentage point to its nine-month increase in sales despite a decrease in the percentage of sales derived from overseas operations, and executives at Gillette Co. called the decline in the dollar "very beneficial" to its earnings.1 Recent studies, for example Jorion (1990), Amihud (1993), and Bodnar and Gentry (1993), have empirically examined U.S. firms' exchange rate exposures, i.e., the relation between changes in the value of the U.S. dollar and * Bartov is from the Leonard N. Stern School of Business, New York University, and Bodnar is from The Wharton School, University of Pennsylvania. We thank Foundation for financial assistance and IBES Incorporated for providing the IBES tape. The Wall Street Journal (1990). 1755 1756 The Journal of Finance contemporaneous changes in the value of the firm as measured by stock prices. Relying on the assumption that capital markets react fully and instantaneously to changes in the U.S. dollar, these studies have met with limited success in identifying a significant correlation between simultaneous stock returns and dollar fluctuations. This difficulty in identifying significant contemporaneous correlations seems surprising in light of the discussion above. There are, however, (at least) two possible explanations why these studies do not document exchange rate exposures on a broader scale. One possible explanation for previous studies' results concerns potential drawbacks in their research designs, most notably in their sample selection procedures. The inclusion of firms with limited linkages to international conditions, firms with exposures of opposite signs, or firms that can react to changes in international conditions at very low cost introduces noise into the analysis a...

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In recent years, German companies have reported consolidated financial statements under German GAAP, U.S. GAAP, or International Accounting Standards (IAS). Market observers, researchers, and regulators have argued that financial statements prepared under the shareholder (or investor) model, such as U.S. GAAP or IAS, provide better information than financial statements prepared under the stakeholder model (German GAAP). They further have argued that U.S. GAAP is more rigorously defined and, therefore, provides information superior to that under IAS. We investigate comparative value relevance, measured as the slope coefficient of the returns/earnings regression. Within our sample of German companies traded on German stock exchanges, the value relevance of U.S. GAAP- and IAS-based earnings is higher than that of German GAAP-based earnings. Our result holds only for profit observations, suggesting that reporting regime does not have an influence on the quality of earnings in the case of loss firms. However, we do not find a significant difference in value relevance between U.S. GAAP and IAS after controlling for self- selection. A major contribution of this research is that, unlike prior research, we measure stock returns for all sample firms in the German stock market only, and therefore are not reliant on the perhaps strong assumption underlying prior studies of similarity of pricing across markets domiciled in different countries.

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The release of the full set of financial statements in Form 10–Q provides investors with the data necessary to estimate the discretionary portion of earnings, thereby allowing them to better assess the integrity of reported quarterly earnings. We thus expect a negative association between unexpected discretionary accruals estimated using 10–Q disclosures and stock returns around 10–Q filing dates. Consistent with our expectations, we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10–Q filing date. Furthermore, this association varies systematically with investor sophistication. Finally, results from portfolio tests indicate that this association is economically as well as statistically significant. One interpretation of our findings is that accruals management has substantial valuation consequences, which are quickly impounded into stock prices.