Earnings management or forecast guidance to meet analyst expectations?

Earnings management or forecast guidance to meet analyst expectations?
Document type
Working Paper
Athanasakou, Vasiliki; Strong, Norman; Walker, Martin
Manchester Business School
Date of publication
1 February 2007
University of Manchester Business School Working Papers. No. 503
Trends: economic, social and technology trends affecting business
Business and management
Material type

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This paper examines whether UK firms engage in earnings management or forecast guidance over the period 1994−2002 in order to ensure that their reported earnings meet analyst earnings expectations. The authors explore two earnings management mechanisms: 

  1. the use of positive abnormal working capital accruals, and 
  2. classification shifting of core expenses to non-recurring items. 

They find no evidence of a positive association between income-increasing abnormal working capital accruals and the
probability of meeting analyst forecasts. Instead they find evidence consistent with larger firms shifting small core expenses to other non-recurring items to just hit analyst expectations with core earnings. They also find that the probability of meeting analyst expectations increases with downward guided forecasts. Overall the results suggest that UK firms are more likely to engage in earnings forecast guidance or, for an important subset of firms, in classification shifting rather than in accruals management to avoid negative earnings surprises.

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