Evidence on the Management of Earnings Components (original) (raw)
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Do Analysts Account for Earnings Management?
We examine whether analysts include the managed earnings component in their forecasts or are surprised by the managed earnings component. We also investigate whether analysts’ earnings forecasts for future periods and their stock recommendations are affected by earnings management in the current period. The results, based on a sample of 583 restatements and a much larger sample of cases where earnings are likely to have been managed upward, are consistent with analysts forecasting the managed earnings number. Further, the managed earnings component appears to influence analysts’ subsequent earnings forecasts, leading to upward forecast revisions and upgraded stock recommendations which appear to be unwarranted given the firms’ subsequent operating performance.
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This paper corroborates the finding of prior studies that managers avoid reporting earnings lower than analyst forecasts (i.e., negative earnings surprises) and provides new evidence of actions contributing to this phenomenon. Specifically, we provide empirical evidence of both (1) upward management of reported earnings and (2) downward 'management' of analysts' forecasts to achieve zero and small positive earnings surprises. Further analysis of the components of earnings management suggests that both the operating cash flow and discretionary accruals components of earnings are managed.
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We examine financial analysts' views on corporate financial reporting issues by means of a survey among 306 analysts and interviews among 21 analysts and compare their views with that of CFOs. Since CFOs believe that meeting or beating analysts' forecasts and managing earnings to achieve this benchmark can enhance firm value, examining analysts' perspectives on these actions improves our understanding on whether CFOs' beliefs are rational or heuristic. Our findings suggest that CFOs' beliefs tend to be rational regarding their focus on earnings and their views on earnings management and smoothing. The main reason is that analysts have difficulty in unraveling certain types of earnings management in a specific firm even though they anticipate earnings management in general. Yet, CFOs are heuristic in their optimism about the consequences of managing earnings, which potentially has negative implications for the value of their firm. and Economics 7, 85-107. Healy, P.M., Wahlen, J.M., 1999. A review of the earnings management literature and its implications for standard setting.
Asia-Pacific Financial Markets, 2008
This paper presents an evidence that a firm's Sensitivity of Stock Price to Earnings News (SSPEN), as measured by surplus stock demand over its supply, affects on incentives to manage earnings and, in turn, Management Forecast Errors (MFE). In particular, we find a tendency for firms rated a Sell (Buy) to engage more (less) frequently in extreme, income-decreasing Earnings Management (EM), indicating that they have relatively stronger (weaker) incentives to create accounting reserves especially in the form of earnings baths than other firms. In contrast, firms rated a Buy (Sell) are more (less) likely to engage in earnings management that leaves reported earnings equal to or slightly higher than management forecasts. The result of empirical evidence from Iranian firms in Tehran Stock Exchange (TSE) showing the existence of a meaningful relationship between SSPEN and EM. Generally, SSPEN can be used to predict EM and Forecast Errors (FEs).
Earnings Management to Meet Earnings Benchmarks: The Impact on Future Performance
The Economic Research Guardian, 2021
The present study investigates whether firms manipulate earnings to attain specific benchmarks (viz. zero and previous year's earnings) engage in opportunistic or signalling earnings management. Specifically, the study examines the relationship of discretionary accruals with the one year-ahead company performance. The study spans from 2012 to 2018 for 304 firms listed in India. The panel corrected standard error (PCSE) regression estimator is used for the analysis. Our analysis finds evidence of efficient earnings management. Specifically, we find that the discretionary accruals of firms that manage earnings to meet the previous year's profit have a significant positive association with future performance and signals the inside information about the future performance. Further, the results show weak evidence of the relationship between accrual earnings management and future performance among firms meeting zero earnings target. We also study how earnings management relates to the subsequent performance in the absence of earnings benchmarks. The findings show that managers, on average, undertake accrual earnings management to signal future performance.
Earnings Management in Companies that Missed and Beat Analyst Consensus
Jurnal Ilmiah Akuntansi dan Bisnis
The aim of this study is to analyze the differences of earnings management between companies that missed and beat analyst consensus. Nonfinancial companies listed in the Indonesia Stock Exchange in 2017–2018 and have analyst consensus data available are used as the research sample, which consist of 28 companies observed for four quarters. The final sample in the analysis consists of 94 observations (firm-quarters). The independent sample t-test is used for data analysis. Results show that companies that missed analyst consensus have greater discretionary accrual than the group of companies that beat analyst consensus. Therefore, differences in earnings management between companies that missed and beat analyst consensus exist. Companies that missed analyst consensus are more inclined to conduct earnings management in the following period. This finding opens the possibility to develop a new hypothesis in the positive accounting research framework. Keywords: Analyst Consensus; Missed a...
The informativeness of earnings and management’s issuance of earnings forecasts
Theory suggests that managers issue earnings forecasts to reduce information asymmetry. An earnings forecast is more effective in reducing information asymmetry if it contains earnings news that is relatively more informative about the firm’s value. We hypothesize that a manager is more likely to issue an earnings forecast if investors perceive that earnings are more informative. We measure earnings informativeness by estimating the firm’s earnings response coefficient (ERC) in quarters prior to the forecast issuance decision. Consistent with our hypothesis, we find that the firm’s historic ERC is positively associated with management’s issuance of earnings forecasts.