Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors?

Posted: 9 Dec 2002

See all articles by Jeffery S. Abarbanell

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

In this paper we present evidence that a firm's stock price sensitivity to earnings news, as measured by outstanding stock recommendation, affects its incentives to manage earnings and, in turn, affects analysts' ex post forecast errors. In particular, we find a tendency for firms rated a Sell (Buy) to engage more (less) frequently in extreme, income-decreasing earnings management, indicating that they have relatively stronger (weaker) incentives to create accounting reserves especially in the form of earnings baths than other firms. In contrast, firms rated a Buy (Sell) are more (less) likely to engage in earnings management that leaves reported earnings equal to or slightly higher than analysts' forecasts. Our empirical results provide direct evidence of purported but, heretofore, weakly documented equity market incentives for firms to manage earnings. They are also consistent with a growing body of literature that finds analysts either cannot anticipate or are not motivated to anticipate completely in their forecasts firms' efforts to manage earnings.

JEL Classification: G29, M41, M43

Suggested Citation

Abarbanell, Jeffery S. and Lehavy, Reuven, Can Stock Recommendations Predict Earnings Management and Analysts' Earnings Forecast Errors?. Available at SSRN: https://ssrn.com/abstract=348785

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Reuven Lehavy (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

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