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The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods

By Craig J Chapman


Prior research hypothesizes that managers use a variety of „real actions ‟ to manage reported earnings to meet or beat certain key benchmarks. Combining two years of new supermarket scanner data for a commodity consumer product with firm-level financial data, I find evidence consistent with the hypothesis of price discounting around the fiscal quarter-end. Firms that just beat prior year quarterly Earnings per Share or Analyst Consensus Earnings Forecasts reduce prices in the final month of the fiscal quarter to do so even when controlling for the effects of a competing hypothesis that firms adjust prices when inventory levels are unusually high. Also examined are the effects of earnings management related price reductions on subsequent reporting periods and on competitor pricing behavior. I find that price reductions associated with a single earning

Year: 2009
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