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Article: Maintaining a Reputation for Consistently Beating Earnings Expectations and the Slippery Slope to Earnings Manipulation

TitleMaintaining a Reputation for Consistently Beating Earnings Expectations and the Slippery Slope to Earnings Manipulation
Authors
KeywordsEarnings Management
Discretionary Accruals
Real Activity
Issue Date2019
PublisherWiley. The Journal's web site is located at http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1911-3846/
Citation
Contemporary Accounting Research, 2019, v. 36 n. 4, p. 1966-1998 How to Cite?
AbstractThis paper investigates whether maintaining a reputation for consistently beating analysts' earnings expectations can motivate executives to move from “within GAAP” earnings management to “outside of GAAP” earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms consistently beat analysts' quarterly earnings forecasts in the three years prior to the manipulation period and continue to do so by smaller “beats” during the manipulation period. We find that manipulating firms beat expectations around 86 percent of the time in the 12 quarters prior to the manipulation period (versus 75 percent for control firms) and that manipulation often ends with a miss in expectations. We document that executives of manipulating firms face strong stock market and CEO pressure to perform. Prior to the manipulation period, these firms have high analyst optimism, growing institutional interest, and high market valuations, along with powerful CEOs. Further, we find that maintaining a reputation for beating expectations is more important than CEO overconfidence and is incremental to CEO equity incentives for explaining manipulation. Our results suggest that pressure to maintain a reputation for beating analysts' expectations can encourage aggressive accounting and, ultimately, earnings manipulation.
Persistent Identifierhttp://hdl.handle.net/10722/284767
ISSN
2019 Impact Factor: 2.026
2015 SCImago Journal Rankings: 2.594

 

DC FieldValueLanguage
dc.contributor.authorChu, J-
dc.contributor.authorDechow, PM-
dc.contributor.authorHui, KW-
dc.contributor.authorWang, AY-
dc.date.accessioned2020-08-07T09:02:21Z-
dc.date.available2020-08-07T09:02:21Z-
dc.date.issued2019-
dc.identifier.citationContemporary Accounting Research, 2019, v. 36 n. 4, p. 1966-1998-
dc.identifier.issn0823-9150-
dc.identifier.urihttp://hdl.handle.net/10722/284767-
dc.description.abstractThis paper investigates whether maintaining a reputation for consistently beating analysts' earnings expectations can motivate executives to move from “within GAAP” earnings management to “outside of GAAP” earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms consistently beat analysts' quarterly earnings forecasts in the three years prior to the manipulation period and continue to do so by smaller “beats” during the manipulation period. We find that manipulating firms beat expectations around 86 percent of the time in the 12 quarters prior to the manipulation period (versus 75 percent for control firms) and that manipulation often ends with a miss in expectations. We document that executives of manipulating firms face strong stock market and CEO pressure to perform. Prior to the manipulation period, these firms have high analyst optimism, growing institutional interest, and high market valuations, along with powerful CEOs. Further, we find that maintaining a reputation for beating expectations is more important than CEO overconfidence and is incremental to CEO equity incentives for explaining manipulation. Our results suggest that pressure to maintain a reputation for beating analysts' expectations can encourage aggressive accounting and, ultimately, earnings manipulation.-
dc.languageeng-
dc.publisherWiley. The Journal's web site is located at http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1911-3846/-
dc.relation.ispartofContemporary Accounting Research-
dc.rightsThis is the peer reviewed version of the following article: Contemporary Accounting Research, 2019, v. 36 n. 4, p. 1966-1998, which has been published in final form at https://doi.org/10.1111/1911-3846.12492. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.-
dc.rights.-
dc.subjectEarnings Management-
dc.subjectDiscretionary Accruals-
dc.subjectReal Activity-
dc.titleMaintaining a Reputation for Consistently Beating Earnings Expectations and the Slippery Slope to Earnings Manipulation-
dc.typeArticle-
dc.identifier.emailHui, KW: kaiwai@hku.hk-
dc.identifier.authorityHui, KW=rp02238-
dc.description.naturepostprint-
dc.identifier.doi10.1111/1911-3846.12492-
dc.identifier.scopuseid_2-s2.0-85066604393-
dc.identifier.hkuros312331-
dc.identifier.volume36-
dc.identifier.issue4-
dc.identifier.spage1966-
dc.identifier.epage1998-
dc.publisher.placeCanada-

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