IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v72y2021i1s0165410121000380.html
   My bibliography  Save this article

What's my target? Individual analyst forecasts and last-chance earnings management

Author

Listed:
  • Beardsley, Erik L.
  • Robinson, John R.
  • Wong, Paul A.

Abstract

Kirk, Reppenhagen, and Tucker (2014) find that investors use individual analyst forecasts as additional earnings benchmarks. We investigate whether executives manage earnings to beat these individual benchmarks. Using year-end effective tax rate (ETR) manipulation as our setting, we find that firms decrease ETRs from 3rd to 4th quarter to meet or beat a greater percentage of individual forecasts. We also find some evidence that firms use incremental ETR changes to meet forecasts by key analysts. After controlling for the distance to the nearest forecast, our evidence shows that firms are more likely to beat an incremental forecast with a decrease in ETR compared to missing an incremental forecast with an increase in ETR. Our study highlights the strategic nature of earnings management by providing evidence that managers consider individual forecasts to calibrate earnings management decisions.

Suggested Citation

  • Beardsley, Erik L. & Robinson, John R. & Wong, Paul A., 2021. "What's my target? Individual analyst forecasts and last-chance earnings management," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    • Handle: RePEc:eee:jaecon:v:72:y:2021:i:1:s0165410121000380
    DOI: 10.1016/j.jacceco.2021.101423
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410121000380
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2021.101423?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    2. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Barth, ME & Elliott, JA & Finn, MW, 1999. "Market rewards associated with patterns of increasing earnings," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 387-413.
    4. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    5. Samuels, Delphine & Taylor, Daniel J. & Verrecchia, Robert E., 2021. "The economics of misreporting and the role of public scrutiny," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    6. Mikhail, MB & Walther, BR & Willis, RH, 1997. "Do security analysts improve their performance with experience?," Journal of Accounting Research, Wiley Blackwell, vol. 35, pages 131-157.
    7. Jonathan M. Karpoff & D. Scott Lee & Gerald S. Martin, 2014. "The Consequences to Managers for Financial Misrepresentation," Springer Books, in: Roberto Pietra & Stuart McLeay & Joshua Ronen (ed.), Accounting and Regulation, edition 127, chapter 0, pages 339-375, Springer.
    8. Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999. "Earnings Management to Exceed Thresholds," The Journal of Business, University of Chicago Press, vol. 72(1), pages 1-33, January.
    9. Michael Kirschenheiter & Nahum D. Melumad, 2002. "Can “Big Bath” and Earnings Smoothing Co‐exist as Equilibrium Financial Reporting Strategies?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 761-796, June.
    10. Michael B. Clement & Senyo Y. Tse, 2005. "Financial Analyst Characteristics and Herding Behavior in Forecasting," Journal of Finance, American Finance Association, vol. 60(1), pages 307-341, February.
    11. Kirsten A. Cook & G. Ryan Huston & Thomas C. Omer, 2008. "Earnings Management through Effective Tax Rates: The Effects of Tax†Planning Investment and the Sarbanes†Oxley Act of 2002," Contemporary Accounting Research, John Wiley & Sons, vol. 25(2), pages 447-471, June.
    12. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 285-303, July.
    13. Graham, John R. & Raedy, Jana S. & Shackelford, Douglas A., 2012. "Research in accounting for income taxes," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 412-434.
    14. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    15. Catherine M. Schrand & M. H. Franco Wong, 2003. "Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109," Contemporary Accounting Research, John Wiley & Sons, vol. 20(3), pages 579-611, September.
    16. Michael C. Jensen, 2005. "Agency Costs of Overvalued Equity," Financial Management, Financial Management Association, vol. 34(1), Spring.
    17. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 633-652.
    18. Brown, Lawrence D., 1991. "Forecast selection when all forecasts are not equally recent," International Journal of Forecasting, Elsevier, vol. 7(3), pages 349-356, November.
    19. Hazarika, Sonali & Karpoff, Jonathan M. & Nahata, Rajarishi, 2012. "Internal corporate governance, CEO turnover, and earnings management," Journal of Financial Economics, Elsevier, vol. 104(1), pages 44-69.
    20. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    21. Sanjay Gupta & Rick C. Laux & Daniel P. Lynch, 2016. "Do Firms Use Tax Reserves to Meet Analysts’ Forecasts? Evidence from the Pre†and Post†FIN 48 Periods," Contemporary Accounting Research, John Wiley & Sons, vol. 33(3), pages 1044-1074, September.
    22. Hainmueller, Jens & Xu, Yiqing, 2013. "ebalance: A Stata Package for Entropy Balancing," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 54(i07).
    23. Cindy Durtschi & Peter Easton, 2005. "Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics Are Not Evidence Ipso Facto," Journal of Accounting Research, Wiley Blackwell, vol. 43(4), pages 557-592, September.
    24. Lev, B & Thiagarajan, Sr, 1993. "Fundamental Information Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 190-215.
    25. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 633-652, June.
    26. Ron Kasznik & Maureen F. McNichols, 2002. "Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 727-759, June.
    27. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    28. O'brien, Patricia C., 1988. "Analysts' forecasts as earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 10(1), pages 53-83, January.
    29. Cindy Durtschi & Peter Easton, 2009. "Earnings Management? Erroneous Inferences Based on Earnings Frequency Distributions," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1249-1281, December.
    30. Oliver Kim & Steve C. Lim & Kenneth W. Shaw, 2001. "The Inefficiency of the Mean Analyst Forecast as a Summary Forecast of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 39(2), pages 329-335, September.
    31. Dan S. Dhaliwal & Cristi A. Gleason & Lillian F. Mills, 2004. "Last†Chance Earnings Management: Using the Tax Expense to Meet Analysts' Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 21(2), pages 431-459, June.
    32. Graham, John R. & Hanlon, Michelle & Shevlin, Terry, 2010. "Barriers to Mobility: The Lockout Effect of U.S. Taxation of Worldwide Corporate Profits," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 1111-1144, December.
    33. Jacob, John & Lys, Thomas Z. & Neale, Margaret A., 1999. "Expertise in forecasting performance of security analysts," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 51-82, November.
    34. Stickel, Scott E, 1992. "Reputation and Performance among Security Analysts," Journal of Finance, American Finance Association, vol. 47(5), pages 1811-1836, December.
    35. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wen, Huiyu & Fang, Jincheng & Gao, Haoyu, 2023. "How FinTech improves financial reporting quality? Evidence from earnings management," Economic Modelling, Elsevier, vol. 126(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    2. Martin Nienhaus, 2022. "Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment," Review of Accounting Studies, Springer, vol. 27(4), pages 1276-1318, December.
    3. Gilliam, Thomas A. & Heflin, Frank & Paterson, Jeffrey S., 2015. "Evidence that the zero-earnings discontinuity has disappeared," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 117-132.
    4. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    5. Halaoua, Sameh & Hamdi, Badreddine & Mejri, Tarek, 2017. "Earnings management to exceed thresholds in continental and Anglo-Saxon accounting models: The British and French cases," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 513-529.
    6. 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.
    7. Chang, Chu-Hsuan & Lin, Hsiou-Wei William, 2018. "Does there prevail momentum in earnings management for seasoned equity offering firms?," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 111-129.
    8. Luis Gomez-Mejia & Cristina Cruz & Claudia Imperatore, 2014. "Financial Reporting and the Protection of Socioemotional Wealth in Family-Controlled Firms," European Accounting Review, Taylor & Francis Journals, vol. 23(3), pages 387-402, September.
    9. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    10. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    11. Bird, Andrew & Karolyi, Stephen A. & Ruchti, Thomas G., 2019. "Understanding the “numbers game”," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    12. Takuya Iwasaki & Norio Kitagawa & Akinobu Shuto, 2012. "Managerial discretion over initial earnings forecasts “Forthcoming in Pacific-Basin Finance Journalâ€," CARF F-Series CARF-F-369, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Nov 2022.
    13. Edmonds, Christopher T. & Edmonds, Jennifer E. & Fu, Richard & Jenkins, David S., 2018. "Price momentum and the premium for meeting or beating analysts' forecasts of earnings," Advances in accounting, Elsevier, vol. 42(C), pages 34-47.
    14. Zhang, Yiyang & Perols, Johan & Robinson, Dahlia & Smith, Thomas, 2018. "Earnings management strategies to maintain a string of meeting or beating analyst expectations," Advances in accounting, Elsevier, vol. 43(C), pages 46-55.
    15. Andrzej Piosik, 2021. "Revenue Identification in Attaining Consensus Estimates on Income Predictions: The Function of Ownership Concentration and Managerial Ownership Confirmation from Poland," Sustainability, MDPI, vol. 13(23), pages 1-16, December.
    16. Olivier Vidal, 2009. "Are asymmetry measures relevant to analyze accounting thresholds? [Les Indicateurs D'Asymétrie Sont- Ils Pertinents Pour Étudier Les Seuils Comptables ?]," Post-Print hal-02104099, HAL.
    17. Emmanuel Mamatzakis & Anna Bagntasarian, 2021. "The nexus between CEO incentives and analysts' earnings forecasts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6205-6248, October.
    18. Barua, Abhijit & Kim, Jung Hoon & Yi, Sheng, 2019. "Hierarchy of earnings thresholds based on discretionary accruals," Advances in accounting, Elsevier, vol. 44(C), pages 29-48.
    19. Wenxia Ge & Jeong-Bon Kim, 2014. "Boards, takeover protection, and real earnings management," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 651-682, November.
    20. Burgstahler, David & Chuk, Elizabeth, 2015. "Do scaling and selection explain earnings discontinuities?," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 168-186.

    More about this item

    Keywords

    Earnings management; Consensus forecast; Analyst forecasts; Forecast dispersion; Tax expense; Analyst heterogeneity;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:72:y:2021:i:1:s0165410121000380. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.