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Abstract:
Although a great deal of research documents the information content of management earnings forecasts at the firm level, there is little research on the informativeness of aggregate earnings guidance. We argue that aggregate earnings guidance is potentially informative at the market/economy level through its effects on expectations about market-level expected future cash flows and expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We also find some evidence that guidance - again, largely downward guidance - is associated with market returns.

Earnings guidance, management earnings forecasts

Abstract:
This paper investigates the usage, determinants and earnings effect of special purpose entities based on a large sample of firms from 1994 to 2004. We find that SPE use has grown substantially in recent years and that the number of SPEs is related to economic motivations, financial reporting objectives and corporate governance. Specifically, SPE use is significantly higher for firms with greater need for funds and higher marginal tax rate. We also find that SPE use increases with closeness to debt covenants, CEO's bonus and weak corporate governance. Finally, we document that the evidence is consistent with SPEs set up for financial reporting purposes playing a role in managing accruals and earnings upwards, whereas the same does not appear to be the case for SPEs set up mainly for economic reasons.

off-balance sheet, special purpose entities, leverage, accruals, return on equity

Abstract:
We examine the relation between internal control quality and the accuracy of management guidance. Consistent with managers in firms with ineffective internal controls relying on erroneous internal management reports when forming guidance, we document less accurate guidance among firms reporting ineffective internal controls. This relation extends to a change analysis, and the impact of ineffective internal controls on forecast accuracy is three times larger when the weakness relates to revenues or cost of goods sold — inputs particularly relevant to forecasting earnings. We conclude that internal control quality has an economically significant effect on internal management reports and thus decisions based on these figures.

Management Guidance, Management Forecast Accuracy, Internal Control over Financial Reporting

Abstract:
We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.

earnings guidance, management forecasts, aggregate earnings, macroeconomic news

Abstract:
We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.

Abstract:
This paper investigates why CFOs become involved in material accounting manipulations. To address this question, we examine various costs and benefits for CFOs who are associated with the manipulations in order to test two explanations: (i) CFOs instigate the earnings manipulations for immediate personal financial benefit, versus (ii) CFOs acquiesce to CEOs’ pressure to manipulate earnings. Consistent with CFOs being acquiescent, we find that CFOs bear higher litigation cost yet reap less financial benefit than CEOs using a comprehensive sample of material accounting manipulations disclosed between 1982 and 2005. CFOs are more likely to be charged by the SEC for accounting manipulations than CEOs. Regarding financial benefit, while CEOs of manipulation firms have higher pay-for-performance sensitivity than CEOs of matched non-manipulating firms, CFOs of manipulating firms have similar pay-for-performance sensitivity to other non-CEO executives of manipulating firms and to CFOs of the matched firms. Moreover, we find that accounting manipulations are more likely when CEO power is high. Finally, our AAER context analyses suggest that CEOs of manipulation firms are more likely than CFOs to be described to have orchestrated the manipulation and to be ordered to disgorge financial gains from the manipulation. Taken together, our findings are consistent with the explanation that CFOs are involved in material accounting manipulations because they succumb to CEO pressure, rather than because they seek immediate personal financial benefit.

earnings quality, accounting manipulation, CFO turnover, CEO power, incentive compensation

Abstract:
This paper investigates the use, determinants and earnings effects of special purpose vehicles. Based on a new proxy of SPV use that can be applied to a broad cross-section of firms over time, we find a six-fold monotonic increase in SPV usage over the 11-year period from 1994 to 2004. Tobit regression results for the determinants of SPV use show that, controlling for the economic motivations, as well as firm size and industry membership, SPV use is increasing in financial accounting incentives but strong corporate governance tends to mitigate SPV use. Specifically, SPV use increases with closeness to debt covenants and CEO's bonus, and SPV use is significantly higher among firms with greater need for funds and higher marginal tax rates. Finally, the evidence is consistent with SPVs arranged for financial reporting purposes playing a role in managing accruals and earnings upwards, whereas the same does not appear to be the case for SPVs set up mainly for economic reasons.

Special purpose vehicles, earnings management, financial reporting

Abstract:
We examine how management quarterly guidance strategy is affected by various outcomes from previously issued guidance. We find that managers are less likely to provide quarterly earnings guidance for a given year when past management forecasts have been overly optimistic, when past forecasts have resulted in earnings disappointments, when past forecasts were unsuccessful at influencing analysts' expectations, and when past forecasts were followed by increased levels of stock price volatility. In addition, even firms continuing to guide give less precise guidance and guide for fewer quarters within a year when they have previously experienced adverse outcomes from issuing guidance. Finally, we document that outcomes from previously issued guidance also help explain the recent discontinuation of quarterly earnings guidance by many high-profile U.S. firms.

quarterly earnings guidance, volatility, stop guidance, management forecasts

Abstract:
We document that, when revising their short-term earnings forecasts in response to management guidance, analysts wishing to curry favor with management weight the guidance more heavily than predicted based on the credibility and usefulness of the guidance. This overweighting of guidance is present prior to equity offerings and other events that could lead to investment banking business. Although analysts sacrifice their forecast accuracy by overweighting management guidance, they appear to benefit, on average, by subsequently gaining the underwriting business for their banks. Thus, while analysts wishing to please managers are optimistic in their long-term earnings forecasts, they take their cue from management when determining their short-term earnings forecasts.

Analyst Incentives; Management Guidance; Management Forecasts; Analyst Forecasts; Analyst Revisions.

Abstract:
Francis et al. (2008) find the surprising result that management forecasts are positively associated with firms’ cost of equity. We re-examine the relationship between the two by separating different attributes of management forecasts and looking into cross-sectional variation in the relationship. We find that the cost of equity is negatively associated with management forecast quality (forecast specificity, accuracy and credibility), but not robustly related to management forecast quantity (frequency), after controlling for earnings quality and other factors. The effect of forecast quality is stronger for smaller firms and firms with lower analyst following. These results are consistent with the theoretical prediction that voluntary disclosure reduces the cost of equity, but primarily for firms with relatively poor information environments.

Management Forecasts, Management Forecast Accuracy, Management Forecast Specificity, Cost of Equity

Abstract:
We examine the relation between internal control quality and the accuracy of management guidance. Consistent with managers in firms with ineffective internal controls relying on erroneous internal management reports when forming guidance, we document less accurate guidance among firms reporting ineffective internal controls. This relation extends to a change analysis, and the impact of ineffective internal controls on forecast accuracy is three times larger when the weakness relates to revenues or cost of goods sold - inputs particularly relevant to forecasting earnings. We conclude that internal control quality has an economically significant effect on internal management reports and thus decisions based on these figures.

Management Guidance, Management Forecast Accuracy, Internal Control over Financial Reporting