[1] Measures of a firm's expected earnings, in turn, include analysts' forecasts of the firm's profit[2][3] and mathematical models of expected earnings based on the earnings of previous accounting periods.
In fact, many studies in accounting research have documented that the market takes up to a year to adjust to earnings announcements, a phenomenon known as the post-earnings announcement drift.
[7] Large negative earnings surprises may have legal and reputational costs to managers.
Firstly, managers can be held personally liable if shareholders sue the firm for failing to disclose negative earnings news promptly.
Secondly, money managers may choose not to hold, and analysts may choose not to follow, the stocks of firms whose managers have reputations for withholding bad news.