A Reputation for Beating Analysts' Expectations and the Slippery Slope to Earnings Manipulation
56 Pages Posted: 19 May 2015 Last revised: 26 Jun 2017
Date Written: June 23, 2017
We investigate whether maintaining a reputation for consistently beating analysts’ earnings expectations motivates executives to move from “within GAAP” earnings management to “outside of GAAP” earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms are both more likely to consistently beat analysts’ quarterly earnings forecasts during the manipulation period as well as in the three years prior to the manipulation period. We examine whether manipulating firms appear to be under strong external market pressure to meet expectations. Consistent with market pressure playing a role, we find that manipulating firms have high long-term growth expectations, growing institutional investment, high market values relative to fundamentals, and are strongly recommended by analysts. We also investigate whether pressure from within the organization influences the likelihood of manipulation. We find that while CEO power plays a role, the evidence on CEO overconfidence is weak. Overall, our results suggest that maintaining a reputation for meeting analysts’ expectations can encourage aggressive accounting and, ultimately, earnings manipulation.
Keywords: earnings manipulation; consecutively beating earnings expectations; market pressure; CEO overconfidence; CEO power; reputation; reference-dependent preferences; analysts’ forecasts and recommendation; institutional investors; overvaluation
JEL Classification: G12, M41
Suggested Citation: Suggested Citation