Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises

Authors

  • David Burgstahler,

    1. The authors are respectively Gerhard G. Mueller Endowed Professor in Accounting at the University of Washington and Associate Professor of Accounting, Santa Clara University.
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  • Michael Eames

    Corresponding author
    1. The authors are respectively Gerhard G. Mueller Endowed Professor in Accounting at the University of Washington and Associate Professor of Accounting, Santa Clara University.
      * Address for correspondence: Michael Eames, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053, USA.
      e-mail: meames@scu.edu
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  • Helpful comments were provided by workshop participants at the University of Washington, the Ninth Annual Conference on Financial Economics and Accounting, and the 23rd Annual Conference of the European Accounting Association, and, especially, Bob Bowen, Sandra Chamberlain, Jim Jiambalvo, Jane Kennedy, Mark Nelson, Gerald Salamon, and Terry Shevlin. The authors are especially thankful to Dawn Matsumoto for assistance in calculating her forecast management proxy. Financial support was provided by the Accounting Development Funds at the University of Washington and Santa Clara University.

* Address for correspondence: Michael Eames, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053, USA.
e-mail: meames@scu.edu

Abstract

Abstract:  This paper corroborates the finding of prior studies that managers avoid reporting earnings lower than analyst forecasts (i.e., negative earnings surprises) and provides new evidence of actions contributing to this phenomenon. Specifically, we provide empirical evidence of both (1) upward management of reported earnings and (2) downward ‘management’ of analysts' forecasts to achieve zero and small positive earnings surprises. Further analysis of the components of earnings management suggests that both the operating cash flow and discretionary accruals components of earnings are managed.

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