To What Extent Does the Financial Reporting Process Curb Earnings Surprise Games?

35 Pages Posted: 11 Dec 2007

See all articles by Lawrence D. Brown

Lawrence D. Brown

Temple University - Department of Accounting

Arianna S. Pinello

Florida Gulf Coast University

Multiple version iconThere are 2 versions of this paper

Abstract

Managers play earnings surprise games to avoid negative earnings surprises by managing earnings upward or by managing analysts' earnings expectations downward. We investigate the effectiveness of the financial reporting process at restraining earnings surprise games. Because the annual reporting process is subject to an independent audit and more rigorous expense recognition rules than interim reporting, it provides managers with fewer opportunities to manage earnings upward. We document that, relative to interim reporting, annual reporting reduces the likelihood of income-increasing earnings management and, to a lesser extent, of negative surprise avoidance, but increases the magnitude of downward expectations management. Our findings suggest that regulatory attempts to monitor corporations' internal checks and balances are likely to be more effective at curbing upward earnings management than at mitigating negative surprise avoidance.

Suggested Citation

Brown, Lawrence D. and Pinello, Arianna S., To What Extent Does the Financial Reporting Process Curb Earnings Surprise Games?. Journal of Accounting Research, Vol. 45, No. 5, pp. 947-981, December 2007. Available at SSRN: https://ssrn.com/abstract=1065889 or http://dx.doi.org/10.1111/j.1475-679X.2007.00256.x

Lawrence D. Brown (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Arianna S. Pinello

Florida Gulf Coast University ( email )

10485 FGCU Blvd S
Ft. Myers, FL 33965-6565
United States

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