Analyst vs. Market Forecasts of Earnings Management to Avoid Small Losses

Journal of Business Finance & Accounting, Forthcoming

43 Pages Posted: 31 Mar 2012

See all articles by Michael Eames

Michael Eames

Santa Clara University - Accounting

Yongtae Kim

Santa Clara University - Leavey School of Business

Date Written: 2012

Abstract

Burgstahler and Eames (2003) present evidence that analysts commonly anticipate earnings management to avoid small losses, but often incorrectly predict its occurrence. Here we consider whether the market’s behavior mimics that of analysts. Our results suggest that analysts exhibit more forecast optimism in their zero earnings forecasts than in their other small earnings forecast levels, and markets exhibit less relative optimism at this point. At the 271-360 day forecast horizon, we find a reduction in the earnings response coefficient at analysts’ zero earnings forecasts and interpret this as reflecting less optimism in market earnings forecasts than in analyst forecasts when analysts forecast zero earnings. This evidence is consistent with the market not following analysts in erroneously predicting earnings management to avoid small losses. We do not find similar evidence for shorter forecast horizons, suggesting that market and analyst forecasts converge towards the end of the year. Finding differences in market and analyst earnings forecasts in this loss avoidance environment raises the possibility of differences in a variety of earnings management and other environments, and sends a general note of caution in using analyst forecasts issued early in the year to proxy market expectations.

Keywords: analyst forecasts, earnings management, market forecasts, small losses

JEL Classification: M41, G14, G24

Suggested Citation

Eames, Michael and Kim, Yongtae, Analyst vs. Market Forecasts of Earnings Management to Avoid Small Losses (2012). Journal of Business Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2031090

Michael Eames (Contact Author)

Santa Clara University - Accounting ( email )

Santa Clara, CA 95053
United States

Yongtae Kim

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

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