How Does Earnings Management Influence Investors’ Perceptions of Firm Value? Survey Evidence from Financial Analysts

Jong, Abe de; Mertens, Gerard; Poel, Marieke van der; Dijk, Ronald van

doi:10.2139/ssrn.2202294

Cited by 18 publications

(26 citation statements)

References 42 publications

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“…Different responses to benchmark beating may be explained by the fact that some types of earnings management are more easily detected than others (Dechow, Ge, & Schrand, 2010;De Jong, Mertens, Van der Poel, & Van Dijk, 2014). De Jong et al (2014) find that while analysts view all earnings management actions to reach a benchmark as value destroying, they are not able to unravel earnings management (Burgstahler & Eames, 2003;Eames & Kim, 2012). Our analysis provides a setting in which market participants seem to be able to distinguish between the cases of earnings management and signaling.…”

Section: Introductionmentioning

confidence: 77%

“…At the same time, investors discount downward earnings management of which they are aware (Dechow et al, 2010). Different responses to target beating may be explained by the fact that some types of earnings management are more easily detected than others (Dechow et al, 2010;De Jong et al, 2014). Analytical models of earnings management, where the capital market has partial knowledge about management's objectives, show that reporting bias in the manager's report reduces its value relevance (Fischer & Verrecchia, 2000).…”

Section: Benchmark Beating and The Market Pricing Of Randd Capitalizationmentioning

confidence: 99%

“…Analytical models of earnings management, where the capital market has partial knowledge about management's objectives, show that reporting bias in the manager's report reduces its value relevance (Fischer & Verrecchia, 2000). In a recent survey, De Jong et al (2014) find that chief financial officers (CFOs) believe that investors expect them to meet earnings benchmarks because missing them is considered a signal for negative future prospects. On the other hand, analysts view all earnings management actions to reach a benchmark as value destroying.…”

Section: Benchmark Beating and The Market Pricing Of Randd Capitalizationmentioning

confidence: 99%

“…Athanasakou, Strong, & Walker, 2011;Bartov, Givoly, & Hayn, 2002;Herrmann, Hope, Payne, & Thomas, 2011;Hribar, Jenkins, & Johnson, 2006;Skinner & Sloan, 2002). Different responses to benchmark beating may be explained by the fact that some types of earnings management are more easily detected than others (Dechow, Ge, & Schrand, 2010;De Jong, Mertens, Van der Poel, & Van Dijk, 2014). De Jong et al (2014) find that while analysts view all earnings management actions to reach a benchmark as value destroying, they are not able to unravel earnings management (Burgstahler & Eames, 2003;Eames & Kim, 2012).…”

Section: Introductionmentioning

confidence: 96%

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Capitalizing Research & Development: Signaling or Earnings Management?

Dinh

Kang

Schultze

2015

European Accounting Review

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This paper analyzes the capitalization of Research & Development (R&D) expenditures underInternational Financial Reporting Standards (IFRS). Discretionary R&D capitalization can be exercised by managers to signal private information on future economic benefits to the market. It can, however, also serve as opportunistic earnings management. We analyze a unique, hand-collected sample of highly R&D intensive German IFRS firms during 1998-2012. We find that market values are not associated with capitalized R&D for the overall sample, indicating that earnings management may be a concern. We identify firm-years for which R&D capitalization is possibly used for pushing their earnings above a specific threshold (e.g. analysts' forecasted earnings, prior year's earnings). Our results show that both the decision to capitalize and how much to capitalize are strongly associated with benchmark beating. Consistently, we find that market values are negatively associated with capitalized R&D for firms who are likely to use capitalization for benchmark beating (about one third of the overall sample). On the other hand, the market values R&D capitalization positively for well-performing firms, for which capitalizing does not matter to beat an earnings benchmark (about half of the overall sample). This finding is robust to controls for endogeneity, various deflators, and different measures for earnings management.

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Section: Introductionmentioning

confidence: 77%

Section: Benchmark Beating and The Market Pricing Of Randd Capitalizationmentioning

confidence: 99%

Section: Benchmark Beating and The Market Pricing Of Randd Capitalizationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 96%

See 2 more Smart Citations

Capitalizing Research & Development: Signaling or Earnings Management?

Dinh

Kang

Schultze

2015

European Accounting Review

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“…Publicly-traded companies often attempt to meet or beat analyst expectations in hopes of generating a greater than expected stock price increase (Choi et al, 2010;de Jong et al, 2012). The pressure to meet or beat analyst expectations may result in pressure from senior management when the bottom line number generated by the financial close process is not the expected number.…”

Section: Need To Meet (Or Beat) Expectationsmentioning

confidence: 99%

The financial close process: Implications for future research

Janvrin

Mascha

2014

International Journal of Accounting Information Systems

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The impact of abnormal real earnings management to meet earnings benchmarks on future operating performance

Al-Shattarat

Hussainey

AlShattarat

2022

International Review of Financial Analysis

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Motivated by agency conflicts of real earnings management (e.g., opportunistic and signalling perspectives), this study investigates the association between firms that manipulate their business operations to meet earnings benchmarks (i.e., zero earnings, last year's earnings) and subsequent operating performance. We examine the effects of the magnitude of real earnings management on firms' future performance for the period 2009 to 2015 for UK firms.Our analysis shows that the manipulation of operating activities such as sales, discretionary expenditures, and production costs to meet earnings benchmarks has a significantly positive consequence for firms' subsequent operating performance and signals firms' good future performance. We also find that firms that manipulate their operating activities in the absence of meeting earnings benchmarks experience a decline in their subsequent operating performance. The findings of this research lend support to our understanding of the process that management follows to evaluate costs and benefits of real earnings management.

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How Does Earnings Management Influence Investors’ Perceptions of Firm Value? Survey Evidence from Financial Analysts

Cited by 18 publications

References 42 publications

Capitalizing Research & Development: Signaling or Earnings Management?

Capitalizing Research & Development: Signaling or Earnings Management?

The financial close process: Implications for future research

The impact of abnormal real earnings management to meet earnings benchmarks on future operating performance

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