Earning Management: Do Firms Play 'Follow the Leader'?

42 Pages Posted: 31 Jul 2012 Last revised: 2 Jun 2016

See all articles by Brian Bratten

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy

Jeff L. Payne

University of Kentucky - Von Allmen School of Accountancy

Wayne B. Thomas

University of Oklahoma

Date Written: October 2014

Abstract

In this study we examine whether the reported performance of one firm affects the discretionary reporting behavior of another firm. We do this by identifying the leader within each industry, defined as the first large announcing firm. We find that the discretionary performance of followers (those firms announcing after the leader) relates positively to the leader’s reported performance. Specifically, when the leader misses analysts’ expectations, followers report lower discretionary accruals, have fewer income-decreasing special items, and are less likely to meet analysts’ expectations. In contrast, when leaders report good news, followers report higher discretionary accruals and are more likely to meet expectations (although we do not find evidence of a positive association between leaders’ good news and followers’ income-decreasing special items). Overall, the results are consistent with managers of followers perceiving that earnings news of the leader will affect investors’ and others’ performance expectations for their firms.

Keywords: earnings management, information transfer, analysts’ forecasts

JEL Classification: M41, D83

Suggested Citation

Bratten, Brian and Payne, Jeff L. and Thomas, Wayne B., Earning Management: Do Firms Play 'Follow the Leader'? (October 2014). Contemporary Accounting Research, Vol. 33, No. 2, pp. 616-643, 2016 , Available at SSRN: https://ssrn.com/abstract=2120859 or http://dx.doi.org/10.2139/ssrn.2120859

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
859-257-1947 (Phone)

HOME PAGE: http://gatton.uky.edu/faculty-research/departments/von-allmen-school-accountancy/directory

Jeff L. Payne

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Wayne B. Thomas (Contact Author)

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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