Review of Accounting Studies

, Volume 15, Issue 1, pp 220–242 | Cite as

Do pennies matter? Investor relations consequences of small negative earnings surprises

  • Richard FrankelEmail author
  • William J. Mayew
  • Yan Sun


Anecdotal and survey evidence suggest that managers take actions to avoid small negative earnings surprises because they fear disproportionate, negative stock-price effects. However, empirical research has failed to document an asymmetric pricing effect. We investigate investor relations costs as an alternative incentive for managers to avoid small negative earnings surprises. Guided by CFO survey evidence from Graham et al. (J Account Econ 40:3–73, 2005), we operationalize investor relations costs using conference call characteristics—call length, call tone, and earnings forecasting propensity around the conference call. We find an asymmetric increase (decrease) in call length (forecasting propensity) for firms that miss analyst expectations by 1 cent compared with changes in adjacent 1-cent intervals. We find no statistically significant evidence that call tone is asymmetrically more negative for firms that miss expectations by a penny. While these results provide some statistical evidence to confirm managerial claims documented in Graham et al. (J Account Econ 40:3–73, 2005) regarding the asymmetrically negative effects of missing expectations, our tests do not suggest severe economic effects.


Investor relations Earnings benchmarks Conference calls Analysts 

JEL Classification

M41 G14 



We gratefully acknowledge the comments of Doron Nissim (editor), two anonymous referees, Shane Dikolli, Yonca Ertimur, John Hand, Nicole Thorne Jenkins, Ben Lansford, Ron King, Raj Mashruwala, Jenny Tucker, Tzachi Zach, seminar participants at Washington University in St. Louis, the 2007 Southeast Summer Accounting Research Conference, and the 2007 American Accounting Association Annual Meeting.


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Olin School of BusinessWashington University in St. LouisSt. LouisMOUSA
  2. 2.Fuqua School of BusinessDuke UniversityDurhamUSA
  3. 3.John Cook School of BusinessSaint Louis UniversitySt. LouisUSA

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