Does Analyst Participation in Earnings Conference Calls Curb Real Activities Earnings Management?

Abstract

We examine analysts’ participation at earnings conference calls when there are indications that a firm engaged in real activities earnings management to meet or narrowly beat analysts’ expectations. We find that analysts are more likely to ask questions on discretionary expenses at conference calls of firms that are suspects of lowering discretionary expenses to meet or narrowly beat analysts’ expectations. The results are attributed to cuts in R&D expenses, which likely have the most adverse impact on firms’ long-term prospects. We also document that analysts’ questions on discretionary expenses to suspect firms are associated with increases in discretionary expenses and a lower likelihood of meeting or narrowly beating analysts’ earnings expectations in the following year. These results suggest that analysts’ participation in earnings conference calls effectively curbs real activities earnings management. Last, we provide evidence that analysts’ questions to suspect firms on discretionary expenses are associated with lower analysts’ revisions of their EPS estimates. Overall, our study suggests that analysts’ active participation in earnings conference calls can deter managers from engaging in real activities earnings management.

Keywords: Analysts, earnings conference calls, earnings management, real earnings management, external monitors

JEL Classification: G10, G24, G30, M40, M41