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Just Say No to Wall Street: Putting a Stop to the Earnings Game

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  • Joseph Fuller
  • Michael C. Jensen

Abstract

CEOs and CFOs put themselves in a bind by providing earnings guidance and then making decisions designed to meet Wall Street's expectations for quarterly earnings. When earnings appear to be coming in short of projections, top managers often react by suggesting or demanding that middle and lower level managers redo their forecasts, plans, and budgets. In some cases, top executives simply acquiesce to increasingly unrealistic analyst forecasts and adopt them as the basis for setting organizational goals and developing internal budgets. But in cases where external expectations are impossible to meet, either approach sets up the firm and its managers for failure. Copyright Copyright (c) 2010 Morgan Stanley.

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Bibliographic Info

Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

Volume (Year): 22 (2010)
Issue (Month): 1 ()
Pages: 59-63

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Handle: RePEc:bla:jacrfn:v:22:y:2010:i:1:p:59-63

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Cited by:
  1. Antonio Torrero Mañas, 2005. "The increasing relevance of the stock market in the world: A new scenario," Working Papers 01/05, Instituto Universitario de Análisis Económico y Social.
  2. Denis Travaillé & Christine Marsal, 2007. "Automatisation des tableaux de bord et cohérence des comportements," Post-Print halshs-00534794, HAL.
  3. (Xuefeng) Jiang, John & Petroni, Kathy R. & Yanyan Wang, Isabel, 2010. "CFOs and CEOs: Who have the most influence on earnings management?," Journal of Financial Economics, Elsevier, vol. 96(3), pages 513-526, June.
  4. Lazonick, William, 2006. "Corporate Governance, Innovative Enterprise, and Economic Development," Working Paper Series RP2006/71, World Institute for Development Economic Research (UNU-WIDER).
  5. Leuz, Christian & Triantis, Alexander & Yue Wang, Tracy, 2008. "Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 181-208, August.
  6. DEGEORGE, François & DING, Yuan & JEANJEAN, Thomas & STOLOWY, Hervé, 2005. "Does Analyst Following Curb Earnings Management?," Les Cahiers de Recherche 810, HEC Paris.
  7. Bruno S. Frey & Margit Osterloh, . "Yes, Managers Should be Paid Like Bureaucrats," IEW - Working Papers 187, Institute for Empirical Research in Economics - University of Zurich.
  8. Jörn Hendrich Block, 2008. "Are CEOs in Family Firms Paid Like Bureaucrats? Evidence from Bayesian and Frequentist Analyses," SFB 649 Discussion Papers SFB649DP2008-033, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  9. Andrei Shleifer & Robert W. Vishny, 2001. "Stock Market Driven Acquisitions," NBER Working Papers 8439, National Bureau of Economic Research, Inc.
  10. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.
  11. Rodolfo Apreda, 2002. "How corporate governance and globalization can run afoul of the law and good practices in business: The Enron's disgraceful affair," CEMA Working Papers: Serie Documentos de Trabajo. 225, Universidad del CEMA.
  12. Chen, Shuping & Matsumoto, Dawn & Rajgopal, Shiva, 2011. "Is silence golden? An empirical analysis of firms that stop giving quarterly earnings guidance," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 134-150, February.
  13. He, Jie (Jack) & Tian, Xuan, 2013. "The dark side of analyst coverage: The case of innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 856-878.
  14. Wang, Weishen & Graefe-Anderson, Rachel & Pyles, Mark K. & Kim, Dongnyoung, 2014. "How entrenched managers beat earnings expectations before and after SOX," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 82-91.
  15. Fatima Alali, 2011. "Audit fees and discretionary accruals: compensation structure effect," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(2), pages 90-113, January.
  16. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
  17. Davila, Toni & Peñalva, Fernando, 2005. "Governance structure and the weighting of performance measures in CEO compensation," IESE Research Papers D/601, IESE Business School.
  18. Sverre Herstad, 2011. "Paradigms, Regimes and the Shifting Notions of Institutional Best Practice," Journal of the Knowledge Economy, Springer, vol. 2(2), pages 173-191, June.

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