Real Earnings Management and the Properties of Analysts’ Forecasts

Advances in Accounting, forthcoming

Posted: 29 Jun 2016 Last revised: 12 Oct 2021

See all articles by Lisa Eiler

Lisa Eiler

University of Montana-School of Business and Administration

Joshua Filzen

Boise State University

Mark Jackson

University of Nevada, Reno - Department of Accounting and Information Systems

Isho Tama-Sweet

California State University, Fullerton - Department of Accounting

Date Written: September 29, 2021

Abstract

Prior literature generally finds analysts are able to identify and process complex financial information. However, research suggests that in certain settings, analysts struggle to fully incorporate into their forecasts all available information. We examine analysts’ forecast properties in the face of a specific type of complex financial information: real earnings management (REM). First, we investigate the relation between measures of REM and analysts’ forecast properties. We find REM measures are associated with greater forecast error and dispersion in the following year. However, REM measures, by definition, capture abnormal operating results, and thus include both firms engaging in manipulative REM as well as firms experiencing firm-specific economic shocks. Thus, we conduct cross-sectional tests of analysts’ forecasts for firms with and without incentives to manipulate earnings. We find that firms with low incentives to engage in earnings management (i.e., firms most likely experiencing firm-specific economic shocks) generate the strongest positive relation between REM measures and the following year’s analysts’ forecast properties, suggesting analysts more fully incorporate the earnings implications of firms with high incentives (i.e., firms most likely engaging in manipulative REM). Our results are consistent across numerous REM proxies and indicators of earnings management incentives.

Advances in Accounting, forthcoming

Keywords: Real earnings management; Forecast accuracy; Forecast dispersion

JEL Classification: D8, G14, M41

Suggested Citation

Eiler, Lisa and Filzen, Joshua and Jackson, Mark and Tama-Sweet, Isho, Real Earnings Management and the Properties of Analysts’ Forecasts (September 29, 2021). Advances in Accounting, forthcoming, Available at SSRN: https://ssrn.com/abstract=2802189 or http://dx.doi.org/10.2139/ssrn.2802189

Lisa Eiler

University of Montana-School of Business and Administration ( email )

Department of Accounting & Finance
Gallagher Business Building-32 Campus Drive
Missoula, MT 59812
United States

Joshua Filzen (Contact Author)

Boise State University ( email )

United States
208-426-3423 (Phone)

Mark Jackson

University of Nevada, Reno - Department of Accounting and Information Systems ( email )

United States

Isho Tama-Sweet

California State University, Fullerton - Department of Accounting ( email )

P.O. Box 34080
Fullerton, CA 92834-6848
United States
657.278.5485 (Phone)

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