Can External Monitoring Affect Corporate Financial Reporting and Disclosure? Evidence from Earnings and Expectations Management

1 Pages Posted: 21 Sep 2008 Last revised: 7 Jul 2015

Date Written: April 8, 2014

Abstract

This study examines whether financial analysts and institutional investors play a disciplinary role in monitoring corporate financial reporting and disclosure. Using a sample of firms that meet or marginally beat analysts’ forecasts, likely through upward earnings management and downward expectations management, this study shows that managers’ use of the two tactics is associated with monitoring measures, including analyst following, analyst experience and independence, institutional ownership, and institutional investors’ experience and investment style. Managers under more effective monitoring by analysts and institutional investors are more likely to manage expectations downward than to manage earnings upward. Overall, the findings are consistent with financial analysts and institutional investors playing a monitoring role in constraining distortions in reported earnings and inducing timely disclosure of bad news.

Keywords: external monitoring, earnings management, expectations management, financial analysts, institutional investors

Suggested Citation

Liu, Alfred, Can External Monitoring Affect Corporate Financial Reporting and Disclosure? Evidence from Earnings and Expectations Management (April 8, 2014). Accounting Horizons, 2014, Available at SSRN: https://ssrn.com/abstract=1270849 or http://dx.doi.org/10.2139/ssrn.1270849

Alfred Liu (Contact Author)

University at Albany, SUNY ( email )

Albany, NY 12222
United States

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