No abstract

No abstract

The paper studies the manner by which earnings expectations are met, measures the rewards to meeting or beating earnings expectations (MBE) formed just prior to the release of quarterly earnings, and tests alternative explanations for this reward. The evidence supports the claims that the MBE phenomenon has become more widespread in recent years and that the pattern by which MBE is obtained is consistent with both earnings management and expectation management. More importantly, the evidence shows that after controlling for the overall earnings performance in the quarter, firms that manage to meet or beat their earnings expectations enjoy an average quarterly return that is higher by almost 3% than their peers that fail to do so. While investors appear to discount MBE cases that are likely to result from expectation or earnings management, the premium in these cases is still significant. Finally, the results are consistent with an economic explanation for the premium placed on earnings surprises, namely that MBE are informative of the firm's future performance.

This paper finds that firms that meet or beat current analysts' earnings expectations (MBE) enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations. Further, such a premium to MBE, although somewhat smaller, exists in the cases where MBE is likely to have been achieved through earnings or expectations management. The findings also indicate that the premium to MBE is a leading indicator of future performance. This premium and its predictive ability are only marginally affected by whether the MBE is genuine or the result of earnings or expectations management. r 2002 Elsevier Science B.V. All rights reserved.

No abstract

To better understand how equity investors influence earnings quality, we compare the quality of accounting numbers produced by two types of public firms -those with publicly-traded equity and those with privately-held equity that are nonetheless considered public by virtue of having publicly-traded debt. We develop and test two hypotheses. The "demand" hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to the stronger demand by investors and creditors stemming from, among other concerns, higher litigation risk. The "opportunistic behavior" hypothesis posits that public equity firms have lower earnings quality than their private equity peers due to management intervention in the earnings process as a result of capital market considerations as well as their own equity-based compensation. We identify a number of attributes associated with the notion of earnings quality -persistence and estimation error of accruals, prevalence of earnings management, timeliness of loss versus gain recognition (conditional conservatism) and the extent of conservatism due to the use of asset-decreasing accounting principles (unconditional conservatism). The results indicate that, consistent with the "opportunistic behavior" hypothesis, private-equity firms have higher quality accruals and a lower propensity to manage income than public equity firms. However, in line with the "demand" hypothesis, public equity firms' financial reports are generally more conservative.

This paper examines whether financial disclosures on acquired entities allow investors to effectively predict goodwill impairment, a task that has become more important following the recent abolishment of goodwill amortization. In predicting goodwill impairment, we use variables relating to the postacquisition performance of the operating segment(s) to which the acquired company's assets are allocated as well as to the characteristics of the acquisition. We find that available disclosures do not provide financial statement users with information to adequately predict future write-offs of goodwill. In fact, the characteristics of the original acquisitions are more powerful predictors of eventual goodwill write-offs than those based on segment disclosures of the acquired entities' performance. We also find that goodwill write-offs lag behind the economic impairment of goodwill by an average of three to four years. For one-third of the companies examined, the delay can extend up to ten years. Although most of our analyses are conducted on goodwill generated before the introduction of Statement of Financial Accounting Standards No. 142 (SFAS 142), certain features of the sample and the analysis suggest that the results are generalizable to the current reporting regime. Sensitivity tests on a smaller sample of goodwill write-offs made upon the adoption of SFAS 142 confirm this expectation.

This study examines properties of analysts' cash flow forecasts and compares them to those exhibited by analysts' earnings forecasts. Our results indicate that analysts' cash flow forecasts are less accurate than analysts' earnings forecasts and improve at a slower rate during the forecast period. Further, cash flow forecasts appear to be a naïve extension of analysts' earnings forecasts, thus providing limited information on expected changes in working capital. We also find that analysts' forecasts of cash flows are of limited information content and are only weakly associated with stock returns. Finally, estimating expected accruals as the difference between analysts' earnings forecasts and their cash flow forecasts does not result in a better detection of earnings management than achieved by commonly used accrual models.