underperforms the miss-threshold group in the sample A as well as B, a re-
sult indicative of strong EM.
However, the lack of significant difference between the meet and surpass
thresholds suggests that evidence on earnings borrowings by the meet-
threshold group is less conclusive than for the ∆EPS threshold. While the
meet-threshold group significantly underperforms the miss-threshold group,
the meet-threshold group is not reliably outperformed by the surpass-
threshold groups. In this case of the annual EPS threshold, evidence in earn-
ings borrowings by the suspect meet-threshold group is less conclusive than
it is for ∆EPS.
5.Concluding DiscussionAnalysts, investors, and boards are keenly interested in financial reports of
earnings because earnings provide critical information for investment deci-
sions. Boards of directors charged with monitoring executives’ performance
recognize the importance of earnings to the firm’s claimants and link mana-
gerial rewards to earnings outcomes. That this nexus of relations generates
660 DEGEORGE, PATEL, ZECKHAUSER
Table 18.2
Next Year’s Relative Performance by Groups Formed around the Zero Threshold
of the Formation Year’s EPS; Observations Are Restricted to ∆EPS > 0 for
Formation QuarterGroups by Performance in Formation Year
A. B. C. D.
Annual EPS Miss Meet Surpass Strongly Surpass
(Cents/Share) in Threshold Threshold Threshold Threshold
Formation Quarter −5 to − 10 to+ 4 +5 to+ 9 +10 to+ 14
No. of Observations 157 231 253 277
Performance over
following year:
- Mean ∆EPS 37.29 10.89 8.36 21.50
- Median ∆EPS 35 10 18 18
- Wilcoxon test* 3.44 −.51 −.784 N.A.
p-values (reporting
column relative to
next column) .0006 .6074 .4329
Note. N.A.=not applicable.
- The Wilcoxon test compares a group’s performance in the postformation year with that of
the next group. Under the null hypothesis that the distributions of performance of the two
groups being compared are the same, the Wilcoxon test is distributed standard normal
(N(0,1)).