The Impact of Earnings Management and Expectations Management on the Usefulness of Earnings and Analyst Forecasts in Firm Valuation

115 Pages Posted: 12 Jun 2012

See all articles by Mostafa Emami

Mostafa Emami

Michigan Technological University; Tarbiat Modares University

Amrollah Amini

Allameh Tabataba'i University

Alireza Emami

University of Tehran

Date Written: May 27, 2012

Abstract

In this dissertation, I examine the impact of earnings management and expectations management on the usefulness of earnings and analyst forecasts in firm valuation. Earnings and analyst forecasts are important inputs into accounting valuation models. Their ability to reflect current and predict future firm performance can help valuation models predict intrinsic value. However, increasing earnings management and expectations management activities in recent years may have adversely affected the usefulness of these information items in firm valuation. This study shows that intrinsic value metrics estimated using manipulated earnings or forecasts have less ability to track stock prices and predict future returns through V/P ratios, providing evidence for the joint hypothesis of (i) long-term market efficiency and (ii) the negative impact of earnings management and expectations management on the usefulness of earnings and analyst forecasts in firm valuation. It contributes to the accounting literature in several ways. First, it challenges the conventional view that more accurate and less biased forecasts are necessarily of better quality and proposes to assess the quality of analyst forecasts directly by examining their usefulness. It also introduces an improved measure for expectations management and presents new evidence on (i) the usefulness of earnings and analyst forecasts in firm valuation; (ii) the negative impacts of earnings management and expectations management on this usefulness; and (iii) the overall performance of accounting valuation models in firm valuation.

Keywords: Earnings Management, Analyst Forecasts, Earnings forecasts

JEL Classification: E64, D23

Suggested Citation

Emami, Mostafa and Amini, Amrollah and Emami, Alireza, The Impact of Earnings Management and Expectations Management on the Usefulness of Earnings and Analyst Forecasts in Firm Valuation (May 27, 2012). Available at SSRN: https://ssrn.com/abstract=2067855 or http://dx.doi.org/10.2139/ssrn.2067855

Mostafa Emami (Contact Author)

Michigan Technological University ( email )

1400 Townsend Drive
Houghton, MI 49931-1295
United States
+18162370018 (Phone)

HOME PAGE: http://orcid.org/0000-0002-3175-5786

Tarbiat Modares University ( email )

University Jalale-Ale-Ahmad Express Way Tehran
P.O.Box: 1767778151, Tehran, Iran
Iran P.O.Box. 1767778151, TX 1767778151
Iran
+989120838426 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Mostafa_Emami/

Amrollah Amini

Allameh Tabataba'i University ( email )

Olympic Boulevard
Tehran, Tehran 1489684511
Iran

Alireza Emami

University of Tehran ( email )

Amirabad e shomali, kuye daneshgah e Tehran
Tehran, UT Tehran 5433174616
Iran

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