Earnings Management or Forecast Guidance to Meet Analyst Expectations?

Accounting and Business Research, Vol. 39, No. 1, pp. 3-35, 2008

53 Pages Posted: 5 Apr 2009

See all articles by Vasiliki E. Athanasakou

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: December 28, 2008

Abstract

We examine whether UK firms engage in earnings management or forecast guidance to ensure that their reported earnings meet analyst earnings expectations. We explore two earnings management mechanisms: a) positive abnormal working capital accruals and b) classification shifting of core expenses to non-recurring items. We find no evidence of a positive association between income-increasing abnormal working capital accruals and the probability of meeting analyst forecasts. Instead we find evidence consistent with a subset of larger firms shifting small core expenses to other non-recurring items to just hit analyst expectations with core earnings. We also find that the probability of meeting analyst expectations increases with downward guided forecasts. Overall our results suggest that UK firms are more likely to engage in earnings forecast guidance or, for a subset of larger firms, in classification shifting rather than in accruals management to avoid negative earnings surprises.

Keywords: meeting analyst expectations, abnormal accruals, earnings forecast guidance, classification shifting

JEL Classification: M41, M43, M47, G29

Suggested Citation

Athanasakou, Vasiliki E. and Strong, Norman Charles and Walker, Martin, Earnings Management or Forecast Guidance to Meet Analyst Expectations? (December 28, 2008). Accounting and Business Research, Vol. 39, No. 1, pp. 3-35, 2008. Available at SSRN: https://ssrn.com/abstract=1373224

Vasiliki E. Athanasakou (Contact Author)

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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