CEO Centrality and Meeting or Beating Analysts’ Earnings Forecasts

Authors

  • Vivek Mande,

    1. The first author is White Nelson Professor of Accounting and Director of Center for Corporate Reporting & Governance, Mihaylo College of Business and Economics, California State University. The second author is Associate Professor of Accounting Milhaylo College of Business and Economics, California State University. They appreciate valuable comments provided by Peter Pope, (editor), an anonymous referee, and participants at the 2009 American Accounting Association annual meeting in New York. Any remaining errors are the sole responsibility of the authors.
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  • Myungsoo Son

    Corresponding author
    1. The first author is White Nelson Professor of Accounting and Director of Center for Corporate Reporting & Governance, Mihaylo College of Business and Economics, California State University. The second author is Associate Professor of Accounting Milhaylo College of Business and Economics, California State University. They appreciate valuable comments provided by Peter Pope, (editor), an anonymous referee, and participants at the 2009 American Accounting Association annual meeting in New York. Any remaining errors are the sole responsibility of the authors.
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Myungsoo Son, Associate Professor of Accounting, Mihaylo College of Business and Economics, California State University, 800 N. State College Blvd. Fullerton, CA 92831–3599.USA. e-mail: mson@fullerton.edu.

Abstract

Abstract:  Using a sample of S&P 500 firms over the period 2000–2005, we examine whether CEO centrality – the relative power of the CEO within the top executive team – is associated with a higher probability of meeting or barely beating financial analysts’ earnings forecasts. We argue that CEOs with relatively high centrality are able to manipulate earnings in order to meet or just beat analysts’ forecasts. Specifically, our results show that there is a positive association between CEO centrality and the likelihood of meeting or just barely beating analysts’ forecasts. This finding holds after controlling for previously identified determinants proxying for managerial incentives, and earnings-related and forecast-related attributes. Additional tests show that CEO centrality is related to managing reported earnings upwards so that earnings targets can be met. Interestingly, our results show that as an explanatory variable, CEO centrality outperforms other proxies for CEO power used in prior studies. Collectively, our results suggest that a concentration of power in the top management team with the CEO can result in undesirable financial reporting behavior.

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