Essays on earnings expectation

This dissertation contains three essays. In the first essay, I consider the effect of accounting conservatism on the market's earnings expectations. Previous studies find that companies whose earnings are affected by accounting conservatism combined with investment growth experience predictable subsequent abnormal returns. I investigate whether sophisticated investors understand the bias and exploit the related pricing anomaly. I find that insiders sell significantly fewer (more) shares when companies' earnings are more (less) depressed than on average by conservatism, indicating insiders time transactions to exploit their better understanding of this phenomenon. Further, I find that insider-trading signals have incremental power in explaining future accounting rates of return and predicting future abnormal returns after controlling for conservatism.; In the second essay, we examine the extent to which executive stock option exercises may be driven by private information. Executives are exploiting positive private information when they exercise the options but hold the shares beyond thirty days, and they are exploiting negative private information when they exercise the options and sell the shares within thirty days. We further find strong evidence that executive's trading gains are positively correlated with time value and depth. Additional findings support the conclusion that executives exploit positive private information by holding options as well as by exercising options and holding the shares.; In the third essay, we examine whether analysts' forecasts errors are predictable out of sample. We employ a comprehensive list of forecasting variables. Our estimation procedures include traditional OLS as well as LAD. While in-sample we find significant prediction power using either OLS or LAD, we find far stronger results using LAD out of sample. Most of the prediction power comes from firms whose forecasts are predicted to be too optimistic. The stock market seems to understand the inefficiencies in analyst forecasts: a trading strategy based on the predicted analyst forecast errors does not generate abnormal profits. Conversely, analysts seem to fail to understand the inefficiencies present in the stock prices: a trading strategy directly based on the predicted stock returns generates significant abnormal returns and abnormal returns are associated with predictable analyst forecast errors.