Do managers use earnings guidance to influence street earnings exclusions?

Christensen, Theodore E.; Merkley, Kenneth J.; Tucker, Jennifer Wu; Venkataraman, S.

doi:10.1007/s11142-011-9158-3

Cited by 86 publications

(50 citation statements)

References 45 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…We measure earnings quality using the quarterly e-loading measure used by Ecker, Francis, Kim, Olsson, and Schipper (2006) using CRSP and the Accruals Quality (AQ) factor data from Frank Ecker's website. We also control for earnings guidance (which we collect from First Call), an indicator variable equal to 1 if managers issue earnings guidance during the 23 quarter, and 0 otherwise, following Brown and Higgins (2005) and Christensen et al (2011).…”

Section: Eps I/b/e/smentioning

confidence: 99%

“…8 Consistent with this notion, prior research finds evidence that managers are able to influence analysts' earnings estimates during the accounting period (Cotter, Tuna, & Wysocki, 2006;Matsumoto, 2002;Richardson, Teoh, & Wysocki, 2004) and also their street earnings reported in I/B/E/S at the end of the period (Christensen, Merkley, Tucker, & Venkataraman 2011;Black, Christensen, Kiosse, & Steffen, 2014). Therefore, based on prior evidence that managers influence analysts' behavior, we argue that it is important to examine managers' non-GAAP reporting choices.…”

mentioning

confidence: 92%

See 1 more Smart Citation

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

Black

Christensen

Kiosse

et al. 2016

Journal of Accounting, Auditing & Finance

Self Cite

View full text Add to dashboard Cite

The frequency of non-GAAP (or "pro forma") reporting has continued to increase in the United States over the last decade, despite preliminary evidence that regulatory intervention led to a decline in non-GAAP disclosures. In particular, the Sarbanes-Oxley Act of 2002 (SOX) and Regulation G (2003) impose strict requirements related to the reporting of non-GAAP numbers.More recently, the Securities and Exchange Commission (SEC) has renewed its emphasis on non-GAAP reporting and declared it a "fraud risk factor." Given the SEC's renewed emphasis on non-GAAP disclosures, we explore the extent to which regulation has curbed potentially misleading disclosures by investigating two measures of aggressive non-GAAP reporting. Consistent with the intent of Congress and the SEC, we find some evidence that managers report adjusted earnings metrics more cautiously in the post-SOX regulatory environment. Specifically, the results suggest that firms reporting non-GAAP earnings in the post-SOX period are less likely to (a) exclude recurring items incremental to those excluded by analysts and (b) use non-GAAP exclusions to meet strategic earnings targets on a non-GAAP basis that they miss based on Institutional Brokers' Estimate System (I/B/E/S) actual earnings. However, we also find that some firms exclude specific recurring items aggressively. Overall, the results suggest that while regulation has generally reduced aggressive non-GAAP reporting, some firms continue to disclose non-GAAP earnings numbers that could be misleading in the post-SOX regulatory environment.

show abstract

Section: Eps I/b/e/smentioning

confidence: 99%

mentioning

confidence: 92%

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

Black

Christensen

Kiosse

et al. 2016

Journal of Accounting, Auditing & Finance

Self Cite

View full text Add to dashboard Cite

show abstract

“…Baik, Farber, and Petroni (2009), one of the few studies that examines the opportunism explanation for exclusions by analysts, identifies optimism "in order to generate more investment banking business" (p. 50) as one of the key motivations for opportunistic exclusion by analysts. However, consistent with a diminished role for opportunism in explaining analyst exclusion incremental to manager exclusion, Christensen et al (2011) shows that managers exclude recurring earnings components, such as stock-based compensation expense, in an attempt to influence analysts to exclude the components. To the extent that opportunism is the primary motivation for exclusions by managers and not by analysts, we expect that, after controlling for exclusion by managers, opportunism has little or no incremental explanatory power for Street exclusion.…”

Section: Opportunism and Predictive Abilitymentioning

confidence: 80%

Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R

2012

View full text Add to dashboard Cite

This study examines how key market participants-managers and analysts-responded to SFAS 123R's controversial requirement that firms recognize stock-based compensation expense. Despite mandated recognition of the expense, some firms' managers exclude it from pro forma earnings and some firms' analysts exclude it from Street earnings. We find evidence consistent with managers opportunistically excluding the expense to increase earnings, smooth earnings, and meet earnings benchmarks but no evidence that these exclusions result in an earnings measure that better predicts future firm performance. In contrast, we find that analysts exclude the expense from earnings forecasts when exclusion increases earnings' predictive ability for future performance and that opportunism generally does not explain exclusion by analysts incremental to exclusion by managers. Thus our findings indicate that opportunism is the primary explanation for exclusion of the expense from pro forma earnings and predictive ability is the primary explanation for exclusion from Street earnings. Our findings suggest the controversy surrounding the recognition of stock-based compensation expense may be attributable to cross-sectional variation in the relevance of the expense for equity valuation, as well as to differing incentives of market participants. We thank David Aboody, Tom Lys, Robert Magee, Sarah McVay, Richard Sloan (editor), workshop participants at the American Accounting Association annual meeting, especially discussant Valentina Zamora, the Financial Accounting and Reporting Section midyear meeting, especially discussant Melissa Lewis, the Kellogg School of Management, Lancaster University, Santa Clara University, Stanford University, and University of Southern California, and two anonymous reviewers for helpful comments and suggestions. We thank our respective schools for financial support.Electronic copy available at: http://ssrn.com/abstract=1681144 Why Do Pro Forma and Street Earnings Not Reflect Changes in GAAP?Evidence from SFAS 123R AbstractThis study examines how key market participants-managers and analysts-responded to SFAS 123R's controversial requirement that firms recognize stock-based compensation expense. Despite mandated recognition of the expense, some firms' managers exclude it from pro forma earnings and some firms' analysts exclude it from Street earnings. We find evidence consistent with managers opportunistically excluding the expense to increase earnings, smooth earnings, and meet earnings benchmarks, but no evidence that such exclusion results in an earnings measure that better predicts future firm performance. In contrast, we find that analysts exclude the expense from earnings forecasts when the exclusion increases earnings' predictive ability for future performance, and opportunism generally does not explain exclusion by analysts incremental to exclusion by managers. Thus, our findings indicate that opportunism is the primary explanation for exclusion of the expense from pro forma earnings and predictive...

show abstract

“…Will subsequent researchers reference Christensen et al (2011) in support of a claim that managers influence the earnings figure that analysts forecast and emphasize in their analyses? The answer is probably ''Yes.''…”

Section: Other Thoughtsmentioning

confidence: 99%

“…1 Introduction Christensen et al (2011) examine whether earnings guidance by firm managers influences the composition of earnings forecasts provided by sell-side analysts. They conclude managers do and that the amounts excluded by analysts is higher when managers issue earnings guidance.…”

mentioning

confidence: 99%

A discussion of “Do managers use earnings guidance to influence street earnings exclusions?”

Bradshaw

2011

Rev Account Stud

View full text Add to dashboard Cite

It is well known that both managers and analysts frequently define earnings by excluding various amounts from GAAP earnings. Christensen et al. (Rev Account Stud, 2011) make a prediction of causality whereby managers actively influence how analysts define earnings. They argue that the mechanism through which managers accomplish this is guidance of analysts' earnings forecasts within a fiscal period. Using a large sample of firms actively followed by analysts, the authors examine whether the existence of earnings guidance is associated with higher levels of total exclusions in analysts' definition of earnings. The study provides suggestive evidence that managers actively influence analysts' definition of earnings that they forecast. However, the indirect nature of the research design calls for additional work to specifically link directed guidance of GAAP earnings exclusions to amounts actually excluded by analysts.

show abstract

Do managers use earnings guidance to influence street earnings exclusions?

Cited by 86 publications

References 45 publications

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?

Why do pro forma and Street earnings not reflect changes in GAAP? Evidence from SFAS 123R

A discussion of “Do managers use earnings guidance to influence street earnings exclusions?”

Contact Info

Product

Resources

About