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Purpose -The purpose of this paper is to examine the relation between audit tenure and how clients manage the annual earnings surprise. Design/methodology/approach -A sample of 5,029 firm-year observations from 1996 to 2003 were employed to examine whether audit tenure is negatively related to the incidence of accrualbased-upward earnings management to avoid negative earnings surprises; and whether audit tenure is positively related to the incidence of downward forecast guidance to avoid negative earnings surprises. Findings -Empirical results indicate a substitution of downward forecast guidance for upward earnings management as audit tenure lengthens.Research limitations/implications -The paper provides evidence that, as the auditor-client relationship lengthens over time, firms turn to downward forecast guidance as a substitute for upward earnings management. One possible limitation of the sample period involves the implementation of the Sarbanes-Oxley Act (SOX) of 2002. Because of the increased financial reporting scrutiny on both management and auditors that accompanies SOX, it is likely that constraints on earnings misstatements increase after SOX. Any decrease in upward earnings management resulting from SOX would thus work against finding a relation between audit tenure and the substitution of downward forecast guidance to prevent negative earnings surprises. Originality/value -This paper supports the notion that audit tenure affects firms' choices among various tactics in their attempts to avoid negative earnings surprises. The results also contribute to the ongoing debate on mandatory audit firm rotation by showing that audit quality increases with audit tenure.

PurposeThe purpose of this paper is to re‐examine the issue of financial analysts' reaction to enterprise resource planning (ERP) announcements by employing actual firm data and archival earnings forecast observations. As an extension of prior ERP studies, this paper also tests whether forecast revisions vary with the timing of adoption.Design/methodology/approachBased on 188 firms that announced ERP plans during the years 1993 through 2002, this paper investigates the financial analysts' reaction to ERP announcements by comparing their earnings forecasts issued immediately before and after the ERP announcement. To examine the effect of adoption timing, this paper partitions the sample into three groups: early (1993‐1997), middle (1998‐1999) and late (2000‐2002) adopters.FindingsResults show that significantly positive revisions occur in longer term forecasts (i.e. three‐year‐ahead forecasts) but not in the shorter term predictions such as one‐ and two‐year‐ahead forecasts. In addition, there is some weak evidence that financial analysts react less positively to middle adopters than to early or late adopters. This finding could be attributed to the fact that many firms adopted ERP systems to work out the Y2K problems during the 1998‐1999 period.Originality/valueThe main finding confirms that financial analysts consider ERP implementations beneficial to the adopters in the long term. Companies contemplating ERP adoption should take this time horizon into account.

Purpose – The purpose of this paper is to examine the association between audit committee characteristics and a firm’s ability to guide analysts’ forecasts downward to meet or beat earnings benchmarks. Design/methodology/approach – The authors expect that a more effective audit committee would be able to reduce managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. Four committee characteristics are used to measure its effectiveness: independence, diligence, expertise and size. Findings – For the pre-SOX (Sarbanes-Oxley Act) period (1996-2002), none of the four audit committee characteristics are significantly associated with managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. For the post-SOX era (2003-2004), however, the likelihood of engaging in downward forecast guidance is significantly lower for firms with larger and more independent audit committees. In addition, the likelihood is significantly lower for audit committees that are more diligent and have a higher proportion of the committee members with accounting or finance-related expertise. Research limitations/implications – Overall, the authors results suggest that, in response to the increased regulatory and listing requirements in the post-SOX era, audit committees have played a more active role in scrutinizing earnings guidance. Our results also suggest that a more effective audit committee in the post-SOX era curbs managers’ tendency to use downward forecast guidance to meet or beat quarterly earnings targets. Originality/value – To the authors knowledge, this study is one of the first to examine the role of the audit committee in reviewing managerial earnings guidance. As earnings guidance plays an important role in the overall financial reporting process over time and given the increasing importance of downward forecast guidance in earnings surprise games in recent years, the authors believe this study addresses an important question and adds to prior literature. Also, this study contributes to their understanding of the changing nature and scope of audit committee oversight activities since the passage of SOX.

This paper investigates whether the U.S. market rewards cross-listed foreign firms and domestic firms differently when they meet or beat earnings expectations (MBE). Using 1,800 matched pairs of foreign firms and domestic firms from year 2005 to 2014, we find that (1) the MBE premium is discounted for foreign firms compared to U.S. domestic firms, (2) although the reward for MBE is discounted for foreign firms, they suffer a similar penalty as domestic firms when they miss expectations, (3) foreign firms from countries with strong legal enforcement and full or substantial IFRS adoption enjoy an MBE premium similar to that of domestic firms, while foreign firms from countries with weak legal enforcement and without full or substantial IFRS adoption experience a discounted MBE premium, and (4) both language difference and culture distance appear to account for the differential MBE premium between foreign firms and domestic firms as well.