Do Managers Use Meeting Analyst Forecasts to Signal Private Information? Evidence from Patent Citations

Abstract

This study examines whether firms manage earnings to meet analyst forecasts to signal superior future performance. Prior research finds that firms use earnings management to just meet analyst forecasts and that these firms have a positive association with future performance (Bartov et al., 2002). There are two potential explanations for the positive association -signaling and attaining benefits that allow for better future performance (i.e., the real benefits explanation). Prior studies cannot provide evidence of signaling because they do not control for the real benefits explanation. Our research design enables us to control for the real benefits explanation because we can identify potential signaling firms within the sample of firms that just meet analyst forecasts. We use a unique database from the National Bureau of Economic Research to construct a proxy for the manager's belief about future firm value due to patents. We find that firms with more patent citations are more likely to just meet the analyst forecast and manage earnings to achieve this goal. We also find firms that just meet analyst forecasts with more patent citations have significantly better performance than firms with fewer patent citations, which is consistent with signaling and not the real benefits explanation.

Corporate Life Cycle and Earnings Benchmarks

“…These results indicate that positive discretionary accruals are generally used to meet or beat analysts’ earnings forecasts, but growth firms are less likely to use them compared to mature firms . The coefficient on N_ANALYST is positive and significant, indicating that firms with greater analyst following are more likely to meet or beat analysts’ earnings forecasts (Gunny and Zhang ). The positive coefficients on MTB , SIZE and CFO suggest that firms with higher growth opportunities, bigger size and more operating cash flows are more likely to meet or beat analysts’ earnings forecasts (McInnis and Collins ).…”

Bank loan spread and private information: pending approval patents

“…flows expected from the patent. Prior research in this area (e.g., Gunny and Zhang 2012) documents that the value of a patent is best captured by citation counts after the patent grant date and employs ex post citation counts to proxy for managers' beliefs. Since patents vary with respect to technological impact and expected economic value, citation counts should better capture the expected cash flow effects of the patent than the number of patents.…”

Managerial Discretion in Accruals and Informational Efficiency

“…According to the signaling view, discretionary accruals provide useful information to investors. A large group of normative and analytical works supports the signaling view (e.g., Holthausen and Leftwich, 1983;Demski, 1998;Sankar and Subramanyam, 2001;Arya et al, 2003;Stocken and Verrecchia, 2004;and Ewert and Wagenhofer, 2012), though relatively limited research examines this perspective from the empirical side (e.g., Subramanyam, 1996;Louis and Robinson, 2005;Bowen et al, 2008;and Gunny and Zhang, 2014). Subramanyam (1996) empirically finds that discretionary accruals are positively associated with contemporaneous stock returns; he explains this result by the ability of discretionary accruals to predict future profitability.…”