Adaptability culture and meeting or beating analysts’ estimates

This paper investigates the relationship between adaptability culture and the propensity of US publicly listed firms to meet or beat analysts’ expectations. We develop a novel firm-level measure of adaptability culture using textual analysis of 10-K reports, employing a bag-of-words methodology based on the Denison Model. Our hypothesis posits that adaptable firms, subject to higher analyst coverage, are more inclined to meet or beat earnings estimates—a proposition supported by the empirical results. Further analysis reveals that adaptability culture is positively associated with real earnings management practices. Notably, during the COVID-19 pandemic, adaptable firms exhibited a shift towards accrual-based earnings management to prevent negative earnings surprises, reflecting the dynamic nature of their financial reporting strategies. These findings suggest that while adaptability culture can enhance firms’ resilience in meeting market expectations, it may also encourage opportunistic behaviour in financial reporting. Our study contributes to the literature on corporate culture, earnings management, and analysts’ expectations, offering insights into how corporate adaptability influences financial reporting practices. The findings have significant implications for regulators and auditors, highlighting the need for enhanced monitoring and control measures to mitigate potential opportunistic behaviour stemming from adaptability-driven cultures. This research underscores the importance of considering corporate culture in assessing the quality and reliability of financial reporting.