How Does Earnings Management Influence Investors’ Perceptions of Firm Value? Survey Evidence from Financial Analysts

34 Pages Posted: 17 Jan 2013 Last revised: 21 Aug 2014

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University

Gerard Mertens

Erasmus University Rotterdam (EUR) - Department of Financial Management

Marieke van der Poel

Erasmus University - Rotterdam School of Management

Ronald van Dijk

ING Investment Management

Date Written: February 26, 2013

Abstract

Survey evidence shows CFOs to believe that earnings management can enhance investor valuation of their firms. This evidence raises the question of correspondence between the beliefs of CFOs and investors. Surveying financial analysts to gain insight into how earnings management influences investor perception of firm value, we find analysts’ and CFOs’ beliefs to be generally consistent. We find that analysts perceive meeting earnings benchmarks and smoothing earnings to enhance investor perception of firm value, and all earnings management actions to reach a benchmark, save share repurchases, to be value destroying. CFOs, however, are reluctant to repurchase shares, preferring to use techniques viewed by analysts as value destroying (e.g., reductions in discretionary spending). Analysts’ inability to unravel such techniques perhaps explains CFOs’ preferences.

Keywords: earnings management, earnings benchmark, earnings smoothing, investors, analysts

JEL Classification: M41, G10, G14

Suggested Citation

de Jong, Abe and Mertens, Gerard and van der Poel, Marieke and van Dijk, Ronald, How Does Earnings Management Influence Investors’ Perceptions of Firm Value? Survey Evidence from Financial Analysts (February 26, 2013). Review of Accounting Studies, Volume 19, Issue 2 (2014), page 606-627. Available at SSRN: https://ssrn.com/abstract=2202294 or http://dx.doi.org/10.2139/ssrn.2202294

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

Gerard Mertens

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2556 (Phone)
+31 10 408 9017 (Fax)

Marieke Van der Poel (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-43
Rotterdam, 3000 DR
Netherlands
+31 10 4081528 (Phone)
+31 10 4089017 (Fax)

HOME PAGE: http://www.rsm.nl/mvanderpoel

Ronald Van Dijk

ING Investment Management ( email )

Schenkkade 65
2595 AK The Hague
Netherlands

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