Audit Committee Accounting Expertise, Expectations Management, and Nonnegative Earnings Surprises

49 Pages Posted: 11 Sep 2008 Last revised: 21 Oct 2013

See all articles by Carol Liu

Carol Liu

Arizona State University (ASU), W.P. Carey School of Business, School of Accountancy, Students

Samuel L. Tiras

Indiana University - Kelley School of Business

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Abstract

We investigate whether accounting expertise on audit committees curtails expectations management to avoid negative earnings surprises. Controlling for the endogenous choice of an accounting expert, we find that firms with an accounting expert serving on the audit committee exhibit: (1) less expectations management to avoid negative earnings surprises; (2) less nonnegative earnings surprises through expectations management; and (3) more nonnegative earnings surprises that are less susceptible to manipulations of both realized earnings and earnings expectations. We find, however, that the inclusion of an accounting expert on the audit committee curtails expectations management only in the interim quarters. While Brown and Pinello (2007) find a greater magnitude of downward revisions in analysts’ forecasts in the fourth quarter, they also document a lower incidence of nonnegative earnings surprises. Together, this suggests that with an accounting expert, audit committees likely view the fourth quarter downward revisions as driven more by guidance than by manipulation, thus focusing on curbing only expectations management in interim quarters.

Keywords: Expectations Management, Nonnegative Earnings Surprises, Accounting Expertise, Audit Committees

JEL Classification: G34, G38, M41

Suggested Citation

Liu, Carol and Tiras, Samuel L. and Zhuang, Zili, Audit Committee Accounting Expertise, Expectations Management, and Nonnegative Earnings Surprises. Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1265596

Carol Liu

Arizona State University (ASU), W.P. Carey School of Business, School of Accountancy, Students ( email )

Tempe, AZ
United States

Samuel L. Tiras (Contact Author)

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

Zili Zhuang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin N.T.
Hong Kong

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