Short-Term Earnings Guidance and Accrual-Based Earnings Management

44 Pages Posted: 20 Sep 2013

See all articles by Andrew C. Call

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Bin Miao

National University of Singapore

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: May 18, 2013

Abstract

Motivated by recent practitioners’ concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management, and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate the above findings by documenting that earnings guidance either has no impact on or actually mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.

Keywords: Earnings guidance, management forecasts, earnings management, abnormal accruals, discretionary revenues

JEL Classification: M40, M41

Suggested Citation

Call, Andrew C. and Chen, Shuping and Miao, Bin and Tong, Yen H., Short-Term Earnings Guidance and Accrual-Based Earnings Management (May 18, 2013). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2327515

Andrew C. Call (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Shuping Chen

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Bin Miao

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore 639798
Singapore
65-6790-5743 (Phone)

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