Earnings Guidance and Earnings Management Constraints

46 Pages Posted: 15 Oct 2012

See all articles by Adam S. Koch

Adam S. Koch

University of Virginia - McIntire School of Commerce

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce

Philip B. Shane

College of William & Mary; Monash University; Monash University - Department of Accounting

Date Written: September 7, 2012

Abstract

We examine how the provision of quarterly earnings guidance is affected by constraints on earnings management. We argue that costs of falling short of one’s own guidance make managers reluctant to issue guidance without sufficient flexibility in their financial reporting system to manage accruals to meet their forecast should that need arise. We find that the probability of providing guidance is inversely related to constraints on future earnings management. Earnings management constraints also decrease the number of fiscal quarters for which firms guide, the average horizon of guidance, and the willingness to provide guidance above analysts’ expectations. Relative to propensities to meet or beat prevailing analyst forecasts in non-guiding firm-quarters, we find that guiding firm-quarter earnings exhibit a greater propensity to meet or just beat and to avoid just missing management’s own forecast. Collectively, our results suggest that managers are myopically motivated to manage earnings to meet their own forecasts.

Keywords: earnings guidance, management forecasts, earnings management, corporate disclosure

JEL Classification: M41, D82, G14, G30

Suggested Citation

Koch, Adam S. and Lefanowicz, Craig E. and Shane, Philip B., Earnings Guidance and Earnings Management Constraints (September 7, 2012). Available at SSRN: https://ssrn.com/abstract=2161762 or http://dx.doi.org/10.2139/ssrn.2161762

Adam S. Koch (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-6356 (Phone)

Philip B. Shane

College of William & Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Monash University - Department of Accounting ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia

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