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What's my target? Individual analyst forecasts and last-chance earnings management

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  • Beardsley, Erik L.
  • Robinson, John R.
  • Wong, Paul A.

Abstract

Kirk, Reppenhagen, and Tucker (2014) find that investors use individual analyst forecasts as additional earnings benchmarks. We investigate whether executives manage earnings to beat these individual benchmarks. Using year-end effective tax rate (ETR) manipulation as our setting, we find that firms decrease ETRs from 3rd to 4th quarter to meet or beat a greater percentage of individual forecasts. We also find some evidence that firms use incremental ETR changes to meet forecasts by key analysts. After controlling for the distance to the nearest forecast, our evidence shows that firms are more likely to beat an incremental forecast with a decrease in ETR compared to missing an incremental forecast with an increase in ETR. Our study highlights the strategic nature of earnings management by providing evidence that managers consider individual forecasts to calibrate earnings management decisions.

Suggested Citation

  • Beardsley, Erik L. & Robinson, John R. & Wong, Paul A., 2021. "What's my target? Individual analyst forecasts and last-chance earnings management," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    • Handle: RePEc:eee:jaecon:v:72:y:2021:i:1:s0165410121000380
    DOI: 10.1016/j.jacceco.2021.101423
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    Cited by:

    1. Du, Bingze & Yu, Jing & Fu, Liling & Ding, Jing, 2024. "Earnings management and analyst forecast," Finance Research Letters, Elsevier, vol. 62(PB).
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    3. Qazi Ghulam Mustafa Qureshi & Yves Mard & Francois Aubert, 2024. "Do analysts predict managed or unmanaged earnings?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 14(2), pages 527-545, June.
    4. Wen, Huiyu & Fang, Jincheng & Gao, Haoyu, 2023. "How FinTech improves financial reporting quality? Evidence from earnings management," Economic Modelling, Elsevier, vol. 126(C).
    5. Xu, Sha & Wu, Dejun, 2023. "Centralized Drug Procurement and asymmetric earnings management: Evidence from China," Finance Research Letters, Elsevier, vol. 58(PA).

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    More about this item

    Keywords

    Earnings management; Consensus forecast; Analyst forecasts; Forecast dispersion; Tax expense; Analyst heterogeneity;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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