Abstract

http://ssrn.com/abstract=1919291
 
 

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The Market Pricing of Management Earnings Forecasts during Periods of Financial Misreporting


Stephen P. Baginski


University of Georgia - J.M. Tull School of Accounting

Sean T. McGuire


Texas A&M University - Department of Accounting

Nathan Y. Sharp


Texas A&M University - Department of Accounting

Brady J. Twedt


Indiana University - Kelley School of Business - Department of Accounting

July 24, 2015


Abstract:     
We investigate whether investors discount the information in management earnings forecasts during periods of accounting fraud. Using a sample of 119 firms that faced SEC enforcement actions for financial misrepresentation, we find that investors do not discount management earnings forecasts issued during fraud periods. To investigate whether investors’ valuation of these forecasts is rational, we examine whether managers change the properties of their forecasts during periods of fraud. We find that the ex-post bias and accuracy of management forecasts relative to restated (i.e., non-fraudulent) earnings does not change during the fraud period, suggesting that forecasts issued while firms are committing fraud predict restated earnings. This finding suggests investors price management earnings forecasts rationally during periods of fraud. Finally, we find fraud firms increase the frequency of their forecasts and that their forecasts are more likely to contain bad news during fraud periods, consistent with managers managing expectations downward during fraud.

Number of Pages in PDF File: 50

Keywords: Management Earnings Forecasts, Voluntary Disclosure, Fraud

JEL Classification: M40, M41, M45


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Date posted: August 30, 2011 ; Last revised: July 25, 2015

Suggested Citation

Baginski, Stephen P. and McGuire, Sean T. and Sharp, Nathan Y. and Twedt, Brady J., The Market Pricing of Management Earnings Forecasts during Periods of Financial Misreporting (July 24, 2015). Available at SSRN: http://ssrn.com/abstract=1919291 or http://dx.doi.org/10.2139/ssrn.1919291

Contact Information

Stephen P. Baginski
University of Georgia - J.M. Tull School of Accounting ( email )
Athens, GA 30602
United States
Sean T. McGuire
Texas A&M University - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States
Nathan Y. Sharp (Contact Author)
Texas A&M University (TAMU) - Department of Accounting ( email )
4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

Brady J. Twedt
Indiana University - Kelley School of Business - Department of Accounting ( email )
1309 E. 10th Street
Bloomington, IN 47405
United States

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