Short-term management earnings forecasts and earnings management through real activities manipulation
ISSN: 1321-7348
Article publication date: 6 December 2019
Issue publication date: 22 January 2020
Abstract
Purpose
The purpose of this paper is to investigate the association between managers’ short-term, quarterly earnings forecast characteristics and earnings management through real activities manipulation.
Design/methodology/approach
Using a propensity-score matched sample from 2000 to 2015, the author examines whether, compared to non-issuers, firms issuing short-term earnings forecasts exhibit abnormal levels of earnings management through the manipulation of real activities such as acceleration of sales, changes in shipment schedules and delaying R&D and maintenance expenditures.
Findings
The finding of this study suggests that firms actually engage in less real activities manipulation when they provide short-term management earnings forecasts. This result does not support the practitioners’ criticism that providing short-term management earnings forecasts increases earnings management. Instead, it suggests that providing management earnings forecasts can reduce information asymmetry between managers and external shareholders, thereby constraining managers’ opportunistic behaviors.
Originality/value
Practitioners have expressed concerns that issuing earnings forecasts may foster managerial myopia, therefore, increasing earnings management. However, recent empirical study found evidence that management earnings forecast mitigates accrual-based earnings management, which is inconsistent with practitioners’ view. This study hence aims to provide timely evidence to this debate by examining the relation between management earnings forecasts and real activities manipulation.
Keywords
Citation
Luo, B. (2020), "Short-term management earnings forecasts and earnings management through real activities manipulation", Asian Review of Accounting, Vol. 28 No. 1, pp. 110-138. https://doi.org/10.1108/ARA-09-2018-0168
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited