Skip to main content
Top

10-08-2023 | Regular Article

Do analysts predict managed or unmanaged earnings?

Authors: Qazi Ghulam Mustafa Qureshi, Yves Mard, Francois Aubert

Published in: Eurasian Business Review

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

This study examines the analysts’ intentions on predicting the earnings forecasts, whether analysts predict managed or unmanaged earnings or in other words, predict accurate forecast or optimist/pessimist forecasts. This study introduces ex-post forecasts as the better proxy to explain analysts’ intentions on earnings forecasts. The important contribution to this line of research is the use of ex-post forecasts in a comparative study of ex-ante and ex-post forecasts. This study covers 3,294 US firm-year observations from 2006 to 2018 and uses various empirical analyses including system GMM to eliminate endogenous effects. Our results suggest that analysts predict the managed earnings to be accurate and to minimize earnings surprises. Results also suggest brokers’ actual estimates closely reflect managed earnings and forecast errors from managed earnings are distributed closer to zero than forecast errors from unmanaged earnings. This study provides value to investors in making investment decisions and for policymakers to provide stringent standards to minimize earnings management and any inside trading.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Footnotes
1
Levitt Jr (1998, p. 5) says that “even if a firm fails to meet the forecasting targets by a single penny, it can lose 6% or more of its stock prices in a single day” during his speech at New York University for Law and Business in September 1998.
 
2
Atiase and Bamber (1994) explain information asymmetry as investors acquiring private pre-disclosure information which is at different levels of precision among them.
 
3
Street earnings are referred to the non-GAAP realized earnings reported by analysts forecast tracking service (Christensen et al. 2011).
 
4
The database Thomson Reuters’ Factset Actuals provide these forecasts or estimates of firms’ earnings per share (EPS) after extraordinary items as broker actuals.
 
5
Please refer Table 1 for variable explanations.
 
6
The relationship remains unchanged when we exclude the subprime crisis period from 2007 to 2010.
 
7
In order to reverse the nature of discretionary expense cuts, Zang (2012) multiplies the residual from the discretionary expense model by -1.
 
8
Richardson (2000) employs cross-section and time series analysis to measure the earnings management proxy. We adopt his strategy as well and discover comparable outcomes across all measuring modalities.
 
9
Weaker significance from the wilcoxon test possibly stems from the tied and zero-valued differences between the observations that reduce statistical power.
 
10
We apply panel regressions with fixed effects in both cases of cross-section and time-series EMs and the results appear to be unchanged.
 
11
Our primary analysis includes the panel regression that is heteroscedasticity-consistent standard errors procedure, which eliminates the heteroscedasticity issues.
 
12
The similar approach is also applied to the median absolute values of ex-ante and ex-post forecast errors and the results, not presented for brevity, are identical.
 
Literature
go back to reference Abarbanell, J. S. (1991). Do analysts’ earnings forecasts incorporate information in prior stock price changes? Journal of Accounting and Economics, 14(2), 147–165.CrossRef Abarbanell, J. S. (1991). Do analysts’ earnings forecasts incorporate information in prior stock price changes? Journal of Accounting and Economics, 14(2), 147–165.CrossRef
go back to reference Abarbanell, J., & Lehavy, R. (2003). Can stock recommendations predict earnings management and analysts’ earnings forecast errors? Journal of Accounting Research, 41(1), 1–31.CrossRef Abarbanell, J., & Lehavy, R. (2003). Can stock recommendations predict earnings management and analysts’ earnings forecast errors? Journal of Accounting Research, 41(1), 1–31.CrossRef
go back to reference Atiase, R. K., & Bamber, L. S. (1994). Trading volume reactions to annual accounting earnings announcements: The incremental role of predisclosure information asymmetry. Journal of Accounting and Economics, 17(3), 309–329.CrossRef Atiase, R. K., & Bamber, L. S. (1994). Trading volume reactions to annual accounting earnings announcements: The incremental role of predisclosure information asymmetry. Journal of Accounting and Economics, 17(3), 309–329.CrossRef
go back to reference Beardsley, E. L., Robinson, J. R., & Wong, P. A. (2021). What’s my target? Individual analyst forecasts and last-chance earnings management. Journal of Accounting and Economics, 72(1), 101423.CrossRef Beardsley, E. L., Robinson, J. R., & Wong, P. A. (2021). What’s my target? Individual analyst forecasts and last-chance earnings management. Journal of Accounting and Economics, 72(1), 101423.CrossRef
go back to reference Bradshaw, M. T., Christensen, T. E., Gee, K. H., & Whipple, B. C. (2018). Analysts’ GAAP earnings forecasts and their implications for accounting research. Journal of Accounting and Economics, 66(1), 46–66.CrossRef Bradshaw, M. T., Christensen, T. E., Gee, K. H., & Whipple, B. C. (2018). Analysts’ GAAP earnings forecasts and their implications for accounting research. Journal of Accounting and Economics, 66(1), 46–66.CrossRef
go back to reference Brown, P., Foster, G., & Noreen, E. (1985). Security analyst multi-year earnings forecasts and the capital market. Amer Accounting Assn. Brown, P., Foster, G., & Noreen, E. (1985). Security analyst multi-year earnings forecasts and the capital market. Amer Accounting Assn.
go back to reference Brown, A. B., Lin, G., & Zhou, A. (2022). Analysts’ forecast optimism: The effects of managers’ incentives on analysts’ forecasts. Journal of Behavioral and Experimental Finance, 35, 100708.CrossRef Brown, A. B., Lin, G., & Zhou, A. (2022). Analysts’ forecast optimism: The effects of managers’ incentives on analysts’ forecasts. Journal of Behavioral and Experimental Finance, 35, 100708.CrossRef
go back to reference Burgstahler, D., & Eames, M. (2003). Earnings management to avoid losses and earnings decreases: Are analysts fooled? Contemporary Accounting Research, 20(2), 253–294.CrossRef Burgstahler, D., & Eames, M. (2003). Earnings management to avoid losses and earnings decreases: Are analysts fooled? Contemporary Accounting Research, 20(2), 253–294.CrossRef
go back to reference Chang, X., Dasgupta, S., & Hilary, G. (2006). Analyst coverage and financing decisions. The Journal of Finance, 61(6), 3009–3048.CrossRef Chang, X., Dasgupta, S., & Hilary, G. (2006). Analyst coverage and financing decisions. The Journal of Finance, 61(6), 3009–3048.CrossRef
go back to reference Chopra, V. K. (1998). Why so much error in analysts’ earnings forecasts? Financial Analysts Journal, 35–42. Chopra, V. K. (1998). Why so much error in analysts’ earnings forecasts? Financial Analysts Journal, 35–42.
go back to reference Christensen, T. E., Merkley, K. J., Tucker, J. W., & Venkataraman, S. (2011). Do managers use earnings guidance to influence street earnings exclusions? Review of accounting studies, 16(3), 501–527.CrossRef Christensen, T. E., Merkley, K. J., Tucker, J. W., & Venkataraman, S. (2011). Do managers use earnings guidance to influence street earnings exclusions? Review of accounting studies, 16(3), 501–527.CrossRef
go back to reference Clinch, G., Stokes, D., & Zhu, T. (2012). Audit quality and information asymmetry between traders. Accounting and Finance, 52(3), 743–765.CrossRef Clinch, G., Stokes, D., & Zhu, T. (2012). Audit quality and information asymmetry between traders. Accounting and Finance, 52(3), 743–765.CrossRef
go back to reference Courteaua, L., Kaob, J. L., & Tianc, Y. (2011). Can analysts detect earnings management. Evidence from Firm Valuation. Courteaua, L., Kaob, J. L., & Tianc, Y. (2011). Can analysts detect earnings management. Evidence from Firm Valuation.
go back to reference Cowen, A., Groysberg, B., & Healy, P. (2006). Which types of analyst firms are more optimistic? Journal of Accounting and Economics, 41(1–2), 119–146.CrossRef Cowen, A., Groysberg, B., & Healy, P. (2006). Which types of analyst firms are more optimistic? Journal of Accounting and Economics, 41(1–2), 119–146.CrossRef
go back to reference Dechow, P. M., Hutton, A. P., & Sloan, R. G. (2000). The relation between analysts’ forecasts of long-term earnings growth and stock price performance following equity offerings. Contemporary Accounting Research, 17(1), 1–32.CrossRef Dechow, P. M., Hutton, A. P., & Sloan, R. G. (2000). The relation between analysts’ forecasts of long-term earnings growth and stock price performance following equity offerings. Contemporary Accounting Research, 17(1), 1–32.CrossRef
go back to reference Dechow, P. M., Richardson, S. A., & Tuna, I. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of accounting studies, 8(2), 355–384.CrossRef Dechow, P. M., Richardson, S. A., & Tuna, I. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of accounting studies, 8(2), 355–384.CrossRef
go back to reference Doyle, J. T., Jennings, J. N., & Soliman, M. T. (2013). Do managers define non-GAAP earnings to meet or beat analyst forecasts? Journal of Accounting and Economics, 56(1), 40–56.CrossRef Doyle, J. T., Jennings, J. N., & Soliman, M. T. (2013). Do managers define non-GAAP earnings to meet or beat analyst forecasts? Journal of Accounting and Economics, 56(1), 40–56.CrossRef
go back to reference Dreman, D. N., & Berry, M. A. (1995). Analyst forecasting errors and their implications for security analysis. Financial Analysts Journal, 30–41. Dreman, D. N., & Berry, M. A. (1995). Analyst forecasting errors and their implications for security analysis. Financial Analysts Journal, 30–41.
go back to reference Dugar, A., & Nathan, S. (1995). The effect of investment banking relationships on financial analysts’ earnings forecasts and investment recommendations. Contemporary Accounting Research, 12(1), 131–160.CrossRef Dugar, A., & Nathan, S. (1995). The effect of investment banking relationships on financial analysts’ earnings forecasts and investment recommendations. Contemporary Accounting Research, 12(1), 131–160.CrossRef
go back to reference Embong, Z., & Hosseini, L. (2018). Analyst forecast accuracy and earnings management. Asian Journal of Accounting and Governance, 10, 97–108.CrossRef Embong, Z., & Hosseini, L. (2018). Analyst forecast accuracy and earnings management. Asian Journal of Accounting and Governance, 10, 97–108.CrossRef
go back to reference Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427–465.CrossRef Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427–465.CrossRef
go back to reference Francis, J., & Philbrick, D. (1993). Analysts’ decisions as products of a multi-task environment. Journal of Accounting Research, 31(2), 216–230.CrossRef Francis, J., & Philbrick, D. (1993). Analysts’ decisions as products of a multi-task environment. Journal of Accounting Research, 31(2), 216–230.CrossRef
go back to reference Froot, K. A. (1989). Consistent covariance matrix estimation with cross-sectional dependence and heteroskedasticity in financial data. Journal of Financial Quantitative Analysis, 333–355. Froot, K. A. (1989). Consistent covariance matrix estimation with cross-sectional dependence and heteroskedasticity in financial data. Journal of Financial Quantitative Analysis, 333–355.
go back to reference Hong, H., & Kubik, J. D. (2003). Analyzing the analysts: Career concerns and biased earnings forecasts. The Journal of Finance, 58(1), 313–351.CrossRef Hong, H., & Kubik, J. D. (2003). Analyzing the analysts: Career concerns and biased earnings forecasts. The Journal of Finance, 58(1), 313–351.CrossRef
go back to reference Jiang, L. (2020). Analyst following, disclosure quality, and discretionary impairments: Evidence from China. Journal of International Financial Management & Accounting, 31(3), 295–322.CrossRef Jiang, L. (2020). Analyst following, disclosure quality, and discretionary impairments: Evidence from China. Journal of International Financial Management & Accounting, 31(3), 295–322.CrossRef
go back to reference Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 193–228. Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 193–228.
go back to reference Lee, J. (2007). Earnings management to just meet analysts’ forecast. Kellogg Graduate School of Management Northwestern University. Lee, J. (2007). Earnings management to just meet analysts’ forecast. Kellogg Graduate School of Management Northwestern University.
go back to reference Levitt Jr, A. (1998). The numbers game. The CPA Journal, 68(12), 14. Levitt Jr, A. (1998). The numbers game. The CPA Journal, 68(12), 14.
go back to reference Lin, H., & McNichols, M. F. (1998). Underwriting relationships, analysts’ earnings forecasts and investment recommendations. Journal of Accounting and Economics, 25(1), 101–127.CrossRef Lin, H., & McNichols, M. F. (1998). Underwriting relationships, analysts’ earnings forecasts and investment recommendations. Journal of Accounting and Economics, 25(1), 101–127.CrossRef
go back to reference Lin, Z., & Wang, L. (2022). Analyst following, financial constraint, and audit opinion shopping: From the perspective of earning management. Journal of International Financial Management & Accounting. Lin, Z., & Wang, L. (2022). Analyst following, financial constraint, and audit opinion shopping: From the perspective of earning management. Journal of International Financial Management & Accounting.
go back to reference Mikhail, M. B., Walther, B. R., & Willis, R. H. (1999). Does forecast accuracy matter to security analysts? The Accounting Review, 74(2), 185–200.CrossRef Mikhail, M. B., Walther, B. R., & Willis, R. H. (1999). Does forecast accuracy matter to security analysts? The Accounting Review, 74(2), 185–200.CrossRef
go back to reference Payne, J. L., & Robb, S. W. (2000). Earnings management: The effect of ex ante earnings expectations. Journal of Accounting Auditing & Finance, 15(4), 371–392.CrossRef Payne, J. L., & Robb, S. W. (2000). Earnings management: The effect of ex ante earnings expectations. Journal of Accounting Auditing & Finance, 15(4), 371–392.CrossRef
go back to reference Porter, J. C., & Kraut, M. A. (2013). Do analysts remove earnings management when forecasting earnings? Academy of Accounting and Financial Studies Journal, 17(2), 95. Porter, J. C., & Kraut, M. A. (2013). Do analysts remove earnings management when forecasting earnings? Academy of Accounting and Financial Studies Journal, 17(2), 95.
go back to reference Richardson, S., Teoh, S. H., & Wysocki, P. D. (2004). The walk-down to beatable analyst forecasts: The role of equity issuance and insider trading incentives. Contemporary Accounting Research, 21(4), 885–924.CrossRef Richardson, S., Teoh, S. H., & Wysocki, P. D. (2004). The walk-down to beatable analyst forecasts: The role of equity issuance and insider trading incentives. Contemporary Accounting Research, 21(4), 885–924.CrossRef
go back to reference Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136.CrossRef Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136.CrossRef
go back to reference Schantl, S. F. (2018). Analyst information acquisition and the relative informativeness of analyst forecasts and managed earnings. Accounting and Business Research, 48(1), 62–76.CrossRef Schantl, S. F. (2018). Analyst information acquisition and the relative informativeness of analyst forecasts and managed earnings. Accounting and Business Research, 48(1), 62–76.CrossRef
go back to reference Schipper, K. (1991). Analysts’ forecasts. Accounting horizons, 5(4), 105. Schipper, K. (1991). Analysts’ forecasts. Accounting horizons, 5(4), 105.
go back to reference Stickel, S. E. (1990). Predicting individual analyst earnings forecasts. Journal of Accounting Research, 409–417. Stickel, S. E. (1990). Predicting individual analyst earnings forecasts. Journal of Accounting Research, 409–417.
go back to reference Stolowy, H., & Breton, G. (2004). Accounts manipulation: A literature review and proposed conceptual framework. Review of Accounting and Finance, 3(1), 5–92.CrossRef Stolowy, H., & Breton, G. (2004). Accounts manipulation: A literature review and proposed conceptual framework. Review of Accounting and Finance, 3(1), 5–92.CrossRef
go back to reference Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.CrossRef Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.CrossRef
Metadata
Title
Do analysts predict managed or unmanaged earnings?
Authors
Qazi Ghulam Mustafa Qureshi
Yves Mard
Francois Aubert
Publication date
10-08-2023
Publisher
Springer International Publishing
Published in
Eurasian Business Review
Print ISSN: 1309-4297
Electronic ISSN: 2147-4281
DOI
https://doi.org/10.1007/s40821-023-00250-7