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Earnings management or forecast guidance to meet analyst expectations?

By Vasiliki E. Athanasakou, Norman Strong and Martin Walker

Abstract

We examine whether UK firms engage in earnings management or forecast guidance to ensure that their reported earnings meet analyst earnings expectations. We explore two earnings management mechanisms: (a) positive abnormal working capital accruals; and (b) classification shifting of core expenses to non-recurring items. We find no evidence of a positive association between income-increasing, abnormal working capital accruals and the probability of meeting analyst forecasts. Instead we find evidence consistent with a subset of larger firms shifting small core expenses to other non-recurring items to just hit analyst expectations with core earnings. We also find that the probability of meeting analyst expectations increases with downward-guided forecasts. Overall our results suggest that UK firms are more likely to engage in earnings forecast guidance or, for a subset of larger firms, in classification shifting rather than in accruals management to avoid negative earnings surprises

Topics: HF5601 Accounting, HG Finance
Publisher: Taylor & Francis
Year: 2009
DOI identifier: 10.1080/00014788.2009.9663347
OAI identifier: oai:eprints.lse.ac.uk:36806
Provided by: LSE Research Online
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