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Attracting Attention in a Limited Attention World: Exploring the Causes and Consequences of Extreme Positive Earnings Surprises

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  • Allison Koester

    (McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Russell Lundholm

    (Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada)

  • Mark Soliman

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

Abstract

We investigate why extreme positive earnings surprises occur and the consequences of these events. We posit that managers know before analysts when extremely good earnings news is developing, but can have incentives to allow the earnings news to surprise the market at the earnings announcement. In particular, managers can use an extreme positive earnings surprise to attract investor attention when they believe their stock is neglected and future performance is expected to be strong. Analysts, who must allocate scarce resources across many firms, can also be inattentive and miss signals that suggest good performance is going to be announced. Using various proxies for extreme positive earnings surprises, management expectations for future performance and desire for attention, and analyst neglect, we find evidence that an extreme positive earnings surprise is a predictable event. These findings are incremental to controlling for a firm’s information environment, earnings volatility, and operating leverage. Finally, we show that extreme positive earnings surprises are a successful method for attracting attention, with significant increases in the number of institutional owners, the number of analysts, and trading volume during the subsequent three years. This paper was accepted by Mary Barth, accounting.

Suggested Citation

  • Allison Koester & Russell Lundholm & Mark Soliman, 2016. "Attracting Attention in a Limited Attention World: Exploring the Causes and Consequences of Extreme Positive Earnings Surprises," Management Science, INFORMS, vol. 62(10), pages 2871-2896, October.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:10:p:2871-2896
    DOI: 10.1287/mnsc.2015.2286
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    4. Wei Cao & Martina Linnenluecke & Jinfang Tian & Rui Xue & Huan Yang, 2023. "How does investor attention affect energy firms' managerial opportunistic behavior? New evidence from China," Business Strategy and the Environment, Wiley Blackwell, vol. 32(7), pages 5025-5043, November.
    5. Chen, Jing & Jung, Michael J. & Tang, Michael, 2023. "Does lowball guidance work? An analysis of firms that consistently beat their guidance by large margins," The British Accounting Review, Elsevier, vol. 55(6).
    6. Paul A. Griffin & David H. Lont, 2021. "Evidence of an increasing trend in earnings surprises over the past two decades: The role of positive manager‐initiated non‐GAAP adjustments," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1525-1559, October.
    7. Garel, Alexandre & Martin-Flores, Jose M. & Petit-Romec, Arthur & Scott, Ayesha, 2021. "Institutional investor distraction and earnings management," Journal of Corporate Finance, Elsevier, vol. 66(C).
    8. Liu, Laura Xiaolei & Lu, Ruichang & Sherman, Ann E. & Zhang, Yong, 2023. "IPO underpricing and limited attention: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 154(C).
    9. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    10. Choi, Hae Mi & Gupta-Mukherjee, Swasti, 2022. "Analysts’ reliance on industry-level versus firm-specific information: Implications for information production," Journal of Banking & Finance, Elsevier, vol. 143(C).
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