What's My Target? Individual Analyst Forecasts and Last-Chance Earnings Management

Beardsley, Erik L.; Robinson, John R.; Wong, Paul A.

doi:10.2139/ssrn.3823432

Cited by 3 publications

(4 citation statements)

References 46 publications

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“…These means for analysts' characteristics are comparable with figures reported in prior research. The mean for Coverage (2.028) is comparable with those reported in prior studies that range between 1.94 and 3.16 (Beardsley et al, 2021; Hong et al, 2020; Horton et al, 2017). The mean for Error (−0.010) has the same sign as well as similar magnitude to those reported in prior research which range from −0.004 to −0.018 (Horton et al, 2017; Wilson & Wu, 2011).…”

Section: Resultssupporting

confidence: 85%

“…It tends to be lower than the level reported in prior studies. For example, Beardsley et al (2021) analyse all the firms in Compustat database for a period of 16 years. It seems normal to expect their Dispersion mean of 0.058 to be higher than the one reported in our study as our sample banks are larger firms who usually disclose more information to analysts.…”

Section: Resultsmentioning

confidence: 99%

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Banks' voluntary disclosure in the audit committee reports, cost of equity and the mediating role of financial analysts

Sahyoun

Magnan

2022

Int J Auditing

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Voluntary disclosure in the audit committee report is expected to provide additional information about the activities undertaken to protect investors. The Securities and Exchange Commission's (SEC) ultimate aim in initially promulgating audit committee disclosure requirements was to reduce firms' cost of equity. However, prior research finds that voluntary disclosure in the audit committee report is akin to impression management. In 2015, the SEC issued a concept release encouraging audit committees to provide additional voluntary disclosures in their reports beyond mandatory requirements. In that context, this paper analyses the effect of the audit committee voluntary disclosure on the cost of equity, with financial analysts playing a mediating role. The sample comprises the top US bank holding companies from 2006 to 2015. We manually code the voluntary disclosure in audit committee reports using a scoring grid. Results show that audit committee voluntary disclosure increases the cost of equity. In addition, the association between voluntary disclosure and the cost of equity is mediated by financial analysts. Hence, we infer that the impression management undertone of voluntary disclosures affects financial analysts' coverage and forecasting properties, which in turn lead to an increase in the cost of equity. The paper's empirical evidence highlights the effects of impression management disclosure by analysing corporate governance voluntary disclosures, cost of equity and financial analysts and brings the issue to the attention of banking regulators, SEC and investors.

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Section: Resultssupporting

confidence: 85%

Section: Resultsmentioning

confidence: 99%

Banks' voluntary disclosure in the audit committee reports, cost of equity and the mediating role of financial analysts

Sahyoun

Magnan

2022

Int J Auditing

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“…Suksonghong and Amran (2020) reveal that suspect firms engage in earnings manipulation through discretionary expenses, sales, and production to either avoid losses or smooth the firm's earnings and identified firms that report low earnings or low growth in earnings. Beardsley et al (2021) analyze whether enterprise managers manipulate earnings to meet analysts' forecasts. They find that reducing the effective tax rates during the third and fourth quarters causes earnings to exceed analysts' forecasts.…”

Section: Empirical Research On Earnings Thresholdsmentioning

confidence: 99%

Earnings thresholds among the listed Brazilian enterprises: A strategy to avoid earnings loss or earnings decreased

Liu

2023

RBGN

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Purpose -Few studies have analyzed how enterprise managers manipulate business activities to meet the earnings thresholds of Brazilian listed companies. This study investigates whether Brazilian listed companies manipulate their business activities to meet their earnings thresholds.Theoretical framework -This study verifies whether Brazilian listed companies manipulate their business activities to meet their earnings thresholds and whether this behavior is consistent with the signaling theory.Design/methodology/approach -We employ the Deng model ( 2018) and analyze how firms manipulate their earnings using gains or losses from property disposition and whether they attempt to meet their earnings thresholds by avoiding earnings losses and decreases. A regression model is then used to verify whether the manipulation affects performance in the following period (i.e., sends signals). A total of 314 samples from 49 Brazilian listed companies during 2011-2018 are examined.Findings -Most Brazilian listed companies do not manipulate their gains or losses from property disposition to avoid earnings losses or decreases, and the manipulation does not affect performance in the following period. Therefore, the signals do not reflect future expectations, thus rejecting the signaling theory.Practical & social implications of research -Enterprise managers could carefully control operating activities. Creditors could monitor business transactions. Accountants should pay attention to monitoring their real earnings, seeking to align the exercise of manager judgment with practices that improve the quality of accounting information. The board of directors could strengthen its control over the property disposition behavior of enterprise managers.Originality/value -This study is the first to verify the earnings manipulation behavior of Brazilian firms by using the signaling theory. We also analyze the manipulation of the gains or losses from property disposition to address the gap in the literature.

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“…Given that managers may respond to market pressure by managing earnings to avoid negative market consequences of missing analyst earnings expectations (e.g. Graham, Harvey, & Rajgopal, 2005;Roychowdhury, 2006;Beardsley, Robinson, & Wong, 2021), a popular notion in the literature is that meeting or just beating analyst forecasts (i.e. MBE by a small margin) is associated with aggressive earnings management (Caskey & Ozel, 2017;Liu, Shen, Welker, Zhang, & Zhao, 2021).…”

Section: Introductionmentioning

confidence: 99%

Does the market reward meeting or beating analyst earnings forecasts? Empirical evidence from China

Luo

Wang

2022

CAFR

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PurposeUsing a sample of 9,898 firm-year observations from 1,821 unique Chinese listed firms over the period from 2004 to 2019, this study aims to investigate whether the market rewards meeting or beating analyst earnings expectations (MBE).Design/methodology/approachThe authors use an event study methodology to capture market reactions to MBE.FindingsThe authors document a stock return premium for beating analyst forecasts by a wide margin. However, there is no stock return premium for firms that meet or just beat analyst forecasts, suggesting that the market is skeptical of earnings management by these firms. This market underreaction is more pronounced for firms with weak external monitoring. Further analysis shows that meeting or just beating analyst forecasts is indicative of superior future financial performance. The authors do not find firms using earnings management to meet or just beat analyst forecasts.Research limitations/implicationsThe authors provide evidence of market underreaction to meeting or just beating analyst forecasts, with the market's over-skepticism of earnings management being a plausible mechanism for this phenomenon.Practical implicationsThe findings of this study are informative to researchers, market participants and regulators concerned about the impact of analysts and earnings management and interested in detecting and constraining managers' earnings management.Originality/valueThe authors provide new insights into how the market reacts to MBE by showing that the market appears to focus on using meeting or just beating analyst forecasts as an indicator of earnings management, while it does not detect managed MBE. Meeting or just beating analyst forecasts is commonly used as a proxy for earnings management in the literature. However, the findings suggest that it is a noisy proxy for earnings management.

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What's My Target? Individual Analyst Forecasts and Last-Chance Earnings Management

Cited by 3 publications

References 46 publications

Banks' voluntary disclosure in the audit committee reports, cost of equity and the mediating role of financial analysts

Banks' voluntary disclosure in the audit committee reports, cost of equity and the mediating role of financial analysts

Earnings thresholds among the listed Brazilian enterprises: A strategy to avoid earnings loss or earnings decreased

Does the market reward meeting or beating analyst earnings forecasts? Empirical evidence from China

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