Earnings Management and Guidance for Meeting or Beating Analysts' Earnings Forecasts

2006 ◽  
Author(s):  
Shu Lin ◽  
Suresh Radhakrishnan ◽  
Lixin (Nancy) Su
Keyword(s):  
Earnings Management ◽  
Earnings Forecasts

Market Reaction to Abnormal Inventory Growth: Evidence for Managerial Decision-Making

2021 ◽  
Author(s):  
Kirsten A. Cook ◽  
G. Ryan Huston ◽  
Michael R. Kinney ◽  
Jeffery S. Smith
Keyword(s):  
Earnings Management ◽  
Management Strategy ◽  
Earnings Forecasts ◽  
Manufacturing Firms ◽  
Fixed Costs ◽  
Managerial Decision ◽  
Managerial Decision Making ◽  
Investor Confidence ◽  
Analyst Earnings ◽  
Market Premium

Prior research demonstrates that manufacturing firms increase production (relative to sales) to transfer fixed costs from cost of goods sold (COGS) to inventory accounts, thereby increasing income to reach or surpass earnings thresholds. We examine how the market reacts to this earnings management strategy. We find that investors respond positively to inventory growth based on an expectation of increased future sales; however, this signal is weaker for inventory manipulators. Further, the market premium from meeting or beating analyst earnings forecasts by manipulating inventory is smaller than the premium for achieving this threshold absent inventory manipulation or through accrual manipulation. Finally, we examine firms considered to be “serial” inventory manipulators, finding that the market consistently discounts earnings beats for these firms, suggesting that inventory manipulation erodes investor confidence in firms’ earnings. Collectively, our results provide new insights into a challenge facing operations managers and finance managers in manufacturing firms.

Earnings Management: New Evidence Based on Deferred Tax Expense

2003 ◽  
Vol 78 (2) ◽  
pp. 491-521 ◽  
Author(s):  
John Phillips ◽  
Morton Pincus ◽  
Sonja Olhoft Rego
Keyword(s):  
Earnings Management ◽  
Earnings Forecasts ◽  
Evidence Based ◽  
Taxable Income ◽  
Abnormal Accruals ◽  
Deferred Tax ◽  
New Evidence ◽  
Tax Expense

We assess the usefulness of deferred tax expense in detecting earnings management. Assuming greater discretion under GAAP than under tax rules, and assuming managers exploit such discretion to manage income upward primarily in ways that do not affect current taxable income, then such earnings management will generate book-tax differences that increase deferred tax expense. Our results provide evidence consistent with deferred tax expense generally being incrementally useful beyond total accruals and abnormal accruals derived from two Jones-type models in detecting earnings management to avoid an earnings decline and to avoid a loss. Only total accruals is incrementally useful in detecting earnings management to meet analysts' earnings forecasts. Deferred tax expense is more accurate than the accrual measures in classifying firm-years as successfully avoiding a loss, whereas no one measure is more accurate in classifying firm-years as avoiding an earnings decline or meeting analysts' forecasts.

The Effect of Earnings Forecasts on Earnings Management

2002 ◽  
Vol 40 (3) ◽  
pp. 631-655 ◽  
Author(s):  
Sunil Dutta ◽  
Frank Gigler
Keyword(s):  
Earnings Management ◽  
Earnings Forecasts

scholarly journals An international comparison of incentives for earnings management in order to meet analysts forecasts

2021 ◽  
Vol 24 (1) ◽  
pp. 75-89
Author(s):  
José Ignacio Jarne Jarne ◽  
Susana Callao Gastón
Keyword(s):  
Earnings Management ◽  
International Comparison ◽  
Stock Markets ◽  
Earnings Forecasts

Una comparación internacional del incentivo para manipular el resultado con el objetivo de alcanzar los pronósticos de los analistas. Investigaciones previas han evidenciado que cuando los resultados alcanzan, o superan, los pronósticos de los analistas, el mercado reacciona positivamente, mientras que, cuando dichos pronósticos no son alcanzados, la reacción del mercado es la contraria. Por ello, los pronósticos se convierten en metas a batir y, tal como la literatura ya ha contrastado, surge un incentivo para la manipulación del resultado. En este contexto, el presente trabajo va más allá, evidenciando que la reacción positiva o negativa es de diferente magnitud según los mercados y que ello explica que la fuerza con la que las empresas perciben el incentivo a manipular los resultados para alcanzar dichos pronósticos también sea diferente según el mercado en el que cotiza. Comparando seis mercados, obtenemos que el incentivo es más potente cuanto mayor es el premio por cumplir los pronósticos, o la penalización por no hacerlo. Previous investigations have shown that when earnings meet analysts’ forecasts, the market reacts positively, and when these forecasts are not reached, the market reacts negatively. For this reason, forecasts become goals to beat, and as the literature has revealed, this creates an incentive for earnings management. The present paper extends prior research, providing evidence that the magnitude of the reward (penalty) for companies meeting (failing to meet) earnings forecasts differs depending on the market. In addition, it reveals that the strength of the incentive for companies to manage their earnings differs depending on the market in which they are listed. We compare six stock markets and find that the most powerful incentives arise when the reward for meeting the forecasts or the penalty for not doing so is greater.

scholarly journals Practice Of Accounting Conservatism In MBE Firms

2014 ◽  
Vol 30 (6) ◽  
pp. 1785 ◽  
Author(s):  
Sang Hyun Park ◽  
Jaywon Lee
Keyword(s):  
Earnings Management ◽  
Credit Rating ◽  
Earnings Forecasts ◽  
Analyst Forecasts ◽  
Accounting Conservatism ◽  
Cost Of Debt ◽  
Management Behavior ◽  
Conservative Accounting ◽  
Expectation Management

Managers sometimes manage earnings upward (i.e., engage in earnings management) or guide analyst forecasts downward (i.e., engage in expectation management) to meet or beat analysts earnings forecasts (MBE). Our results suggest that certain management behavior to achieve MBE is highly associated with firms level of accounting conservatism. In detail, we find that (1) the level of accounting conservatism decreases as firms achieve MBE in consecutive years, (2) engaging in earnings management to achieve MBE lowers firms level of conservatism, and (3) firms that achieve MBE in consecutive years (CMBE firms) whose credit rating had been elevated practice less conservative accounting implying that the MBE string itself might act as a substitute for conservative accounting in lowering firms cost of debt.

Convertible Bonds Issuance Terms, Management Forecasts, and Earnings Management: Evidence from Taiwan Market

2005 ◽  
Vol 08 (03) ◽  
pp. 543-571 ◽  
Author(s):  
Chen-Lung Chin ◽  
Tyrone T. Lin ◽  
Chia-Chi Lee
Keyword(s):  
Earnings Management ◽  
Forecast Error ◽  
Earnings Forecasts ◽  
Convertible Bonds ◽  
Convertible Bond ◽  
Earnings Forecast ◽  
Management Forecasts ◽  
Empirical Results ◽  
Conversion Period

Convertible bond (CB) issuers have been required to include financial forecasts in prospectuses filed with the Taiwan Securities and Futures Commission (TSFC) since 1991. This study examines the association between CB issuance terms and the extent of optimistic initial earnings forecasts and earnings management, as well as the association between CB issuance terms and the extent of reported (post-managed) earnings forecasts. Empirical results indicate that: (1) the likelihood of the issuing company making an optimistic initial earnings forecast (positive initial forecast error) increases with conversion price, issuance amount, and issuance period, but decreases with an increasing conversion period and reselling premium; (2) earnings management was pervasive in the year of issue of the CB; and (3) a substitutive relation exists between earnings management and issuance terms in CB issuing.

The Effect of Analysts' Disaggregated Forecasts on Investors and Managers: Evidence Using Pre-Tax Forecasts

2018 ◽  
Vol 94 (3) ◽  
pp. 279-302 ◽  
Author(s):  
Landon M. Mauler
Keyword(s):  
Firm Performance ◽  
Earnings Management ◽  
Income Tax ◽  
Firm Behavior ◽  
Earnings Forecasts ◽  
The Impact ◽  
Tax Expense

ABSTRACT I examine whether analysts' tax forecasts are informative to investors and whether analysts' tax forecasts impact firm behavior. Using I/B/E/S data from 2002–2014, I find that investors utilize both analysts' pre- and after-tax earnings forecasts in evaluating firm performance, indicating analysts' tax forecasts are value-relevant. Furthermore, evidence that investors discount earnings management through the income tax expense is limited to firms with tax forecast coverage. In examining the impact of analysts' tax forecasts on firm behavior, I find analysts' tax forecast coverage is positively associated with quantitative and qualitative tax footnote disclosure. The results suggest that analysts' tax forecasts are value-relevant and that analysts' tax coverage impacts firm decisions related to the income tax expense account. This evidence informs academics and practitioners as to the role of analysts' tax forecasts.

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