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How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts

Author

Listed:
  • Abe Jong

    (Erasmus University
    University of Groningen)

  • Gerard Mertens

    (Open Universiteit Nederland)

  • Marieke Poel

    (Erasmus University)

  • Ronald Dijk

    (APG Asset Management)

Abstract

Survey evidence shows CFOs to believe that earnings management can enhance investor valuation of their firms. This evidence raises the question of correspondence between the beliefs of CFOs and investors. Surveying financial analysts to gain insight into how earnings management influences investor perception of firm value, we find analysts’ and CFOs’ beliefs to be generally consistent. We find that analysts perceive meeting earnings benchmarks and smoothing earnings to enhance investor perception of firm value and all earnings management actions to reach a benchmark, save share repurchases, to be value destroying. CFOs, however, are reluctant to repurchase shares, preferring to use techniques viewed by analysts as value destroying (e.g., reductions in discretionary spending). Analysts’ inability to unravel such techniques perhaps explains CFOs’ preferences.

Suggested Citation

  • Abe Jong & Gerard Mertens & Marieke Poel & Ronald Dijk, 2014. "How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts," Review of Accounting Studies, Springer, vol. 19(2), pages 606-627, June.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:2:d:10.1007_s11142-013-9250-y
    DOI: 10.1007/s11142-013-9250-y
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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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