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Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors?

Journal of accounting research, 2003-03, Vol.41 (1), p.1-31 [Peer Reviewed Journal]

Copyright 2003 The Institute of Professional Accounting, University of Chicago ;University of Chicago on behalf of the Institute of Professional Accounting, 2003 ;Copyright Institute of Professional Accounting Mar 2003 ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/1475-679X.00093 ;CODEN: JACRBR

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  • Title:
    Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors?
  • Author: Abarbanell, Jeffery ; Lehavy, Reuven
  • Subjects: Analytical forecasting ; Creative accounting ; Earnings forecasting ; Earnings management ; Effects ; Efficient markets ; Equity ; Financial management ; Financial reporting ; Forecasting models ; Incentives ; P values ; Recommendations ; Sales forecasting ; Statistical analysis ; Statistical forecasts ; Stock prices ; Studies
  • Is Part Of: Journal of accounting research, 2003-03, Vol.41 (1), p.1-31
  • Description: In this article we present evidence that a firm's stock price sensitivity to earnings news, as measured by outstanding stock recommendation, affects its incentives to manage earnings and, in turn, affects analysts' ex post forecast errors. In particular, we find a tendency for firms rated a Sell (Buy) to engage more (less) frequently in extreme, income-decreasing earnings management, indicating that they have relatively stronger (weaker) incentives to create accounting reserves especially in the form of earnings baths than other firms. In contrast, firms rated a Buy (Sell) are more (less) likely to engage in earnings management that leaves reported earnings equal to or slightly higher than analysts' forecasts. Our empirical results provide direct evidence of purported, but heretofore, weakly documented equity market incentives for firms to manage earnings. They are also consistent with a growing body of literature that finds analysts either cannot anticipate or are not motivated to anticipate completely in their forecasts firms' efforts to manage earnings.
  • Publisher: Boston, USA and Oxford, UK: Blackwell Publishing Inc
  • Language: English
  • Identifier: ISSN: 0021-8456
    EISSN: 1475-679X
    DOI: 10.1111/1475-679X.00093
    CODEN: JACRBR
  • Source: Alma/SFX Local Collection
    RePEc
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