Short-term earnings guidance and accrual-based earnings management

Abstract

Motivated by recent practitioners' concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate these findings by documenting that earnings guidance either has no impact on or mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.

Impact of the disclosure of audit engagement partners on audit quality: Evidence from the USA

“…Table provides the descriptive statistics for variables used in the abnormal accruals analysis (panel A) and the univariate tests comparing the mean and median discretionary accruals between the period before (predisclosure) and after (postdisclosure) the requirement became effective (panel B). Table , panel A, shows the average value of absolute discretionary accruals (i.e., the dependent variable in the abnormal accruals analysis) is 0.1771, which is similar to the value in the prior literature (e.g., Call, Chen, Miao, & Tong, ). About 25% of the firm‐year observations belong to the postdisclosure period.…”

Conditional conservatism and disaggregated bad news indicators in accrual models

“…argue that the combined model is preferable conceptually because it captures two distinct economic roles of accruals.4 Lu et al (2011), Call et al (2014,He (2015), and others use Ball and Shivakumar's model in robustness checks but primarily use symmetric accrual models Dechow and Ge (2006). show that the role of accruals differs in growing and declining firms, with much greater use of conservative accounting rules for the latter, and examine the implications for earnings persistence Hsu et al (2011Hsu et al ( , 2012.…”

Wealth Destruction Effects of Annual Management Forecasts

“…For instance, Houston et al (2010) find no evidence that firms that stop quarterly guidance focus more on long-term investments. Call et al (2014) find evidence that quarterly earnings guidance mitigates myopic earnings management. Chen, Huang, and Lao (2015) observe that management guidance alleviates managerial myopia.…”