An Examination of Earnings Surprises for Urban and Rural Firms

In this paper, we examine the association between firm location and earnings surprises at earnings announcements. Prior studies show that firms located in urban areas draw more attention from the investment community, which may lead to more capital market pressures. In turn, urban firms could have stronger incentives to present “better” performance measures at earnings announcements. Consistent with this view, we find that (1) urban firms are more likely to report non-negative earnings surprises than rural firms; (2) urban firms are more likely to report non-GAAP earnings numbers; and (3) urban firms are more likely to make income-increasing adjustments to GAAP earnings to arrive at non-GAAP earnings than rural firms. We also find that the earnings response coefficient (ERC) of urban firms is smaller than that of rural firms, which suggests that more opportunistic earnings metrics of urban firms are factored into stock prices.