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Voluntary management earnings forecasts and discretionary accruals: evidence from Danish IPOs

  • Jeffrey Gramlich
  • Ole S�rensen
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    This paper seeks to determine whether Danish managers exercise discretionary accruals to reach earnings forecast targets they voluntarily specify in conjunction with initial public offerings (IPOs). Because the Danish accounting and legal environment is more permissive than the US, we use Denmark as a natural laboratory for learning how business would occur without strict rules, enforcement and sanctions. Danish managers often volunteer pro forma financial statements for results that are expected to occur subsequent to the IPO. We examine a sample of 58 Danish firms that issue voluntary management earnings forecasts in connection with IPOs that occur between 1984 and 1996. The evidence we uncover strongly suggests that pre-managed earnings are adjusted toward these targets. In contrast with Kasznik's (1999) results related to voluntarily forecasting American firms, managers of Danish firms exercise discretionary accruals to mitigate earnings forecast errors regardless of whether pre-managed earnings are less, or greater, than the IPO forecast amount.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0963818042000203338
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    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 13 (2004)
    Issue (Month): 2 ()
    Pages: 235-259

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    Handle: RePEc:taf:euract:v:13:y:2004:i:2:p:235-259
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    1. Bowen, Robert M. & DuCharme, Larry & Shores, D., 1995. "Stakeholders' implicit claims and accounting method choice," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 255-295, December.
    2. Ivo Welch & Siew Hong Teoh & T.J. Wong, 1995. "Earnings Management and The Post-Issue Underperformance in Seasoned Equity Offerings," Finance 9-95., University of California at Los Angeles.
    3. Fishman, Michael J & Hagerty, Kathleen M, 1989. " Disclosure Decisions by Firms and the Competition for Price Efficienc y," Journal of Finance, American Finance Association, vol. 44(3), pages 633-46, July.
    4. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-94, September.
    5. Sunil Dutta, 2002. "The Effect of Earnings Forecasts on Earnings Management," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 631-655, 06.
    6. Guay, W. & Kothari, S.P. & Watts, R.L., 1996. "A Market-Based Evaluation of Discretionary-Accrual Models," Papers 96-01, Rochester, Business - Financial Research and Policy Studies.
    7. 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.
    8. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    9. Aboody, David & Kasznik, Ron, 2000. "CEO stock option awards and the timing of corporate voluntary disclosures," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 73-100, February.
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