On the Use of Accounting vs. Real Earnings Management to Meet Earnings Expectations - A Market Analysis
Jeff Zeyun Chen
University of Colorado at Boulder
Lynn L. Rees
Texas A&M University - Department of Accounting
In this study we examine the extent to which accounting earnings management (AEM) and real earnings management (REM) differ in their impact on future operating performance and how the market rewards firms for meeting or beating analysts’ forecasts. We find that firms using REM exclusively to meet analysts' expectations outperform firms using AEM in the longer term and perform no worse than firms that meet without earnings management. We also find that the equity premium to meeting or beating analysts’ forecasts is significantly higher for firms that use REM to achieve this earnings target than for firms that use AEM. However, we find no difference in the premium for firms that use REM relative to firms that do not engage in earnings management. These findings suggest that REM possesses positive signaling effects about future firm performance.
Number of Pages in PDF File: 45
Keywords: earnings forecasts, financial analysts, earnings management, meet or beat expectations
JEL Classification: G14, M41
Date posted: December 12, 2007 ; Last revised: December 19, 2010
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