Earnings Guidance and Earnings Manipulation
48 Pages Posted: 11 Oct 2011 Last revised: 18 Nov 2015
Date Written: November 17, 2015
This paper investigates the costs, benefits and frequency of management earnings guidance issued by firms manipulating earnings. We find that, when manipulations are detected, misstating firms issuing guidance and their managers incur additional legal costs, as reflected in the higher settlement amounts paid by these firms and a higher likelihood that their CEOs are banned from serving as officers, directors, or accountants of public companies in the future. Next, we provide evidence suggesting that earnings guidance benefits earnings manipulators by delaying the detection of misstatements. Finally, we find that firms manipulating earnings are significantly more likely to issue earnings guidance than matched control firms. Taken together, the above evidence suggests that firms manipulating earnings act as if they perceive the benefits of issuing earnings guidance to be greater than the costs, increasing their earnings guidance issuance during the misstatement period.
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