Earnings Momentum and Earnings Management

49 Pages Posted: 1 May 1999  

James N. Myers

University of Tennessee, Knoxville - Haslam College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Douglas J. Skinner

The University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

Abstract

This paper provides evidence on firms that report long "strings" of consecutive increases in earnings per share (EPS). First, we find 746 firms that report earnings strings of at least 20 quarters since 1962, and show that this frequency is much larger than would be expected by chance. We interpret this as prima facie evidence of earnings management. Next, we document that these firms enjoy abnormal returns that average over 20 percent per year during the first five years of these strings, and these returns are larger than those of firms reporting at least five years of consecutive increases in annual (but not quarterly) EPS. We argue that these market premia, and the rapidity with which they disappear once the strings end, provide managers with incentives to maintain and extend the strings. Finally, we present several tests that document how managers of these firms use various earnings management tools to help their firms sustain and extend these strings.

Keywords: earnings momentum, earnings management, accruals, management incentives

JEL Classification: M41, G30

Suggested Citation

Myers, James N. and Myers, Linda A. and Skinner, Douglas J., Earnings Momentum and Earnings Management (August 2006). Available at SSRN: https://ssrn.com/abstract=741244 or http://dx.doi.org/10.2139/ssrn.741244

James N. Myers

University of Tennessee, Knoxville - Haslam College of Business ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Douglas J. Skinner (Contact Author)

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

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