Earnings Management Strategies to Maintain a String of Meeting or Beating Analyst Expectations

Advances in Accounting, Forthcoming

39 Pages Posted: 28 Sep 2018 Last revised: 14 May 2020

See all articles by Yiyang Zhang

Yiyang Zhang

Youngstown State University - Lariccia School of Accounting and Finance

Johan Perols

University of San Diego - Department of Accountancy; University of San Diego - School of Business Administration

Dahlia Robinson

University of South Florida

Thomas Joseph Smith

University of South Florida

Date Written: September 10, 2018

Abstract

Prior studies provide consistent evidence that firms use a combination of management forecast guidance, accrual earning management (AEM), and real activity earnings management (REM) to meet or beat analyst expectations (MBE). While recent evidence (e.g. Kross et al. 2011) suggests that management forecast guidance is a less effective MBE strategy for firms with longer strings of MBE, less is known about the use of AEM and REM to manage MBE strings as the string lengthens. Since managements’ incentives and actions taken to maintain earnings strings may differ as the string lengthens and becomes more difficult to sustain, we examine the extent to which managers use AEM and REM to MBE as the string grows longer. We find evidence that while firms with shorter MBE strings appear more likely to use income increasing AEM to sustain their MBE strings, the use of income increasing AEM decreases for longer MBE strings. Further, we document that firms with longer MBE strings use more income increasing REM to avoid breaking the MBE string. Collectively, our results suggest that researchers investigating firms’ earnings management choices to sustain MBE strings should control for the length of the MBE string in their research design.

Keywords: Meeting or Beating Expectations, Accrual Earnings Management, Real Earnings Management

JEL Classification: G23 G30, G32, M41

Suggested Citation

Zhang, Yiyang and Perols, Johan and Robinson, Dahlia and Smith, Thomas Joseph, Earnings Management Strategies to Maintain a String of Meeting or Beating Analyst Expectations (September 10, 2018). Advances in Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3247009

Yiyang Zhang

Youngstown State University - Lariccia School of Accounting and Finance ( email )

United States

Johan Perols

University of San Diego - Department of Accountancy ( email )

223 Olin Hall
5998 Alcalá Park
San Diego, CA
United States

University of San Diego - School of Business Administration ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Dahlia Robinson

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
8139746888 (Phone)

Thomas Joseph Smith (Contact Author)

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

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