Beating Earnings Benchmarks Between Equity-Financing and Debt-Financing Firms

This paper studies on the relation between the firm's financing types and beating earnings thresholds. We classify firms into equity-financing and debt-financing firms. Debt-financing firms are top 25% and equity-financing firms are bottom 25% on the ranking based on debt ratio. We regard firms with high debt ratio as relying on debt and firms with low debt ratio as relying on stock when financing. Earnings thresholds(or earnings benchmarks) are target earnings levels that firms are trying to reach: zero earnings, prior period's earnings, and analysts' earnings forecasts. There have been many studies on beating earnings thresholds but lack of studies regarding the firms' financing types and its relation to beating earnings thresholds. Kwak et al.(2008) demonstrate that firms with high debt ratio are less likely to beat analysts' earnings forecasts. This paper extends Kwak et al.(2008) to profit reporting and earnings increasing as well as earnings forecasts, with quarterly data. This is because quarterly reports have become important to capital market since 2000, and therefore managers have high incentives to beat quarterly earnings thresholds(Song et al., 2008; Park et al., 2007). According to results, equity-financing firms are more likely to beat earnings forecasts and zero earnings than debt-financing firms, and there is no difference for beating prior earnings between the two types of financing firms. In addition, we classify firms into bond-issuers and non bond issuers and compare beating earnings thresholds between the two groups. The results show us that bond issuers are more likely to beat prior earnings than non-bond issuers.