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Incentive to manipulate earnings and its connection to analysts’ forecasts, trading, and corporate governance

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  • Deniz Igan
  • Marcelo Pinheiro

Abstract

We develop a model where insiders’ decision to manipulate earnings is linked both to their stake and to corporate governance. We show how earnings manipulation affects analysts’ forecasts and institutional trading. More precisely, whenever there is “excessive” earnings manipulation, we observe less optimistic analysts. Furthermore, institutions exhibit positive feedback trading behavior and appear to “front-run” analysts’ errors. Finally, companies with strong corporate governance are less prone to these phenomena, being able to avoid the detrimental effects of insiders’ incentives. We then provide strong empirical evidence to support our model. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Deniz Igan & Marcelo Pinheiro, 2012. "Incentive to manipulate earnings and its connection to analysts’ forecasts, trading, and corporate governance," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(4), pages 781-821, October.
    • Handle: RePEc:spr:jecfin:v:36:y:2012:i:4:p:781-821
    DOI: 10.1007/s12197-010-9131-1
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    More about this item

    Keywords

    Analysts’ Forecasts; Earnings Manipulation; Ownership; G11; G12; G14; G34;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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