Investor skepticism and the incremental effects of small positive sales surprises

Abstract

Prior research suggests that investors see a small positive earnings surprise as a warning sign indicating a higher chance of creative accounting. This study finds that investors see a small positive sales surprise as another warning sign of manipulation. I compare the coefficient in the regression of abnormal stock returns on sales surprise (while controlling for earnings surprise) across subsamples of firms. The coefficient is lower for firms with small positive sales surprises than firms with sales surprises in any other range. I also find that while a positive sales surprise is generally regarded as good news, a small positive sales surprise has no significant effect on abnormal stock returns among firms reporting a small positive earnings surprise.I also find that investor skepticism toward small positive sales surprises is rational. Small positive sales surprises are more likely to reverse in the future than sales surprises in any other range. Moreover, analysts react to small positive sales surprises in a way that suggests they also expect these sales surprises to be less sustainable in the future.