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Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises

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  • David Burgstahler
  • Michael Eames
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    Abstract

    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. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 33 (2006-06)
    Issue (Month): 5-6 ()
    Pages: 633-652

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    Handle: RePEc:bla:jbfnac:v:33:y:2006-06:i:5-6:p:633-652

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. Roberto Garcia-Castro & Miguel Ariño & Miguel Canela, 2010. "Does Social Performance Really Lead to Financial Performance? Accounting for Endogeneity," Journal of Business Ethics, Springer, vol. 92(1), pages 107-126, March.
    2. Doyle, Jeffrey T. & Jennings, Jared N. & Soliman, Mark T., 2013. "Do managers define non-GAAP earnings to meet or beat analyst forecasts?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 40-56.
    3. Régis Breton & Sébastien Galanti & Christophe Hurlin & Anne-Gaël Vaubourg, 2013. "Does the firm-analyst relationship matter in explaining analysts' earnings forecast errors?," Working Papers hal-00862996, HAL.
    4. Bouwman, Christa H.S., 2014. "Managerial optimism and earnings smoothing," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 283-303.
    5. Pamela Murphy & M. Dacin, 2011. "Psychological Pathways to Fraud: Understanding and Preventing Fraud in Organizations," Journal of Business Ethics, Springer, vol. 101(4), pages 601-618, July.
    6. Li-Chin Jennifer & Ho Chao-Shin Liu & Thomas Schaefer, 2010. "Audit tenure and earnings surprise management," Review of Accounting and Finance, Emerald Group Publishing, vol. 9(2), pages 116-138, May.
    7. 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.
    8. Olivier Vidal, 2009. "Les Indicateurs D'Asymétrie Sont-Ils Pertinents Pour Étudier Les Seuils Comptables ?," Post-Print halshs-00458894, HAL.
    9. Christopher Bleibtreu & Ulrike Stefani, 2012. "The Interdependence Between Audit Market Structure and the Quality of Financial Reporting: The Case of Non-Audit Services," Working Paper Series of the Department of Economics, University of Konstanz 2012-01, Department of Economics, University of Konstanz.
    10. Xiaotong Wang & Heng-fu Zou, 2008. "Stock Return Dynamics under Earnings Management," CEMA Working Papers 331, China Economics and Management Academy, Central University of Finance and Economics.
    11. Anne-Gael Vaubourg & Valdete Berisha-Krasniqui & Sébastien Galanti & Christophe Hurlin & Régis Breton, 2013. "We study whether financial analysts' concern for preserving good relationships with firms' managers motivates them to issue pessimistic or optimistic forecasts. Based on a dataset of one-yearahead EPS," Larefi Working Papers 1304, Larefi, Université Bordeaux 4.
    12. Canace, Thomas G. & Caylor, Marcus L. & Johnson, Peter M. & Lopez, Thomas J., 2010. "The effect of Regulation Fair Disclosure on expectations management: International evidence," Journal of Accounting and Public Policy, Elsevier, vol. 29(5), pages 403-423, September.
    13. Sandip Dhole & Sagarika Mishra & Ananda M Pal, . "Further Evidence on the Importance of Analysts’ Cash Flow Forecasts," Financial Econometics Series 2013_01, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    14. Vahid Biglari Author_Email: vahidbiglari@siswa.um.edu.my & Gurcharan Singh Pritam Singh, 2011. "The Effect Of Market Incentives On Analyst Forecast Management And Analyst Forecast Error," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-215, Conference Master Resources.
    15. Kraft, Anastasia & Lee, Bong Soo & Lopatta, Kerstin, 2014. "Management earnings forecasts, insider trading, and information asymmetry," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 96-123.
    16. Rogers, Jonathan L. & Van Buskirk, Andrew, 2013. "Bundled forecasts in empirical accounting research," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 43-65.
    17. Régis Breton & Sébastien Galanti & Christophe Hurlin & Anne-Gaël Vaubourg, 2011. "Does soft information matter for financial analysts' forecasts? A gravity model approach," Working Papers halshs-00829908, HAL.
    18. Li-Chin Jennifer Ho & Chao-Shin Liu & Bo Ouyang, 2012. "Bloated balance sheet, earnings management, and forecast guidance," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(2), pages 120-140, May.

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