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On the Use of Accounting vs. Real Earnings Management to Meet Earnings Expectations - A Market Analysis

55 Pages Posted: 12 Dec 2007 Last revised: 21 Jun 2017

Jeff Zeyun Chen

Texas Christian University

Lynn L. Rees

Texas A&M University - Department of Accounting

Shiva Sivaramakrishnan

Rice University

Date Written: November 1, 2010

Abstract

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.

Keywords: earnings forecasts, financial analysts, earnings management, meet or beat expectations

JEL Classification: G14, M41

Suggested Citation

Chen, Jeff Zeyun and Rees, Lynn L. and Sivaramakrishnan, Shiva, On the Use of Accounting vs. Real Earnings Management to Meet Earnings Expectations - A Market Analysis (November 1, 2010). Available at SSRN: https://ssrn.com/abstract=1070122 or http://dx.doi.org/10.2139/ssrn.1070122

Jeff Zeyun Chen

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Lynn L. Rees

Texas A&M University - Department of Accounting ( email )

Mays Business School
College Station, TX 77843-4353
United States
979-845-6078 (Phone)
979-845-0028 (Fax)

Shiva Sivaramakrishnan (Contact Author)

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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