Do Managers Use Meeting Analyst Forecasts to Signal Private Information? Evidence from Patent Citations

24 Pages Posted: 20 Oct 2014

See all articles by Katherine Gunny

Katherine Gunny

University of Colorado at Denver

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: September/October 2014

Abstract

This study examines whether firms manage earnings to meet analyst forecasts to signal superior future performance. Prior research finds that firms use earnings management to just meet analyst forecasts and that these firms have a positive association with future performance (Bartov et al., 2002). There are two potential explanations for the positive association – signaling and attaining benefits that allow for better future performance (i.e., the real benefits explanation). Prior studies cannot provide evidence of signaling because they do not control for the real benefits explanation. Our research design enables us to control for the real benefits explanation because we can identify potential signaling firms within the sample of firms that just meet analyst forecasts. We use a unique database from the National Bureau of Economic Research to construct a proxy for the manager's belief about future firm value due to patents. We find that firms with more patent citations are more likely to just meet the analyst forecast and manage earnings to achieve this goal. We also find firms that just meet analyst forecasts with more patent citations have significantly better performance than firms with fewer patent citations, which is consistent with signaling and not the real benefits explanation.

Keywords: signaling, analyst forecasts, earnings management, patents, research and development

Suggested Citation

Gunny, Katherine and Zhang, Tracey Chunqi, Do Managers Use Meeting Analyst Forecasts to Signal Private Information? Evidence from Patent Citations (September/October 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 7-8, pp. 950-973, 2014, Available at SSRN: https://ssrn.com/abstract=2511996 or http://dx.doi.org/10.1111/jbfa.12082

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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