Maintaining a Reputation for Consistently Beating Earnings Expectations and the Slippery Slope to Earnings Manipulation

• 成果类型: Article
• 署名作者: Chu, Jenny; Dechow, Patricia M.; Hui, Kai Wai; Wang, Annika Yu
• 署名单位: University of Cambridge; University of Southern California; University of Hong Kong; University of Houston System; University of Houston
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12492
• 发表日期: 2019
• 页码: 1966-1998
• 关键词: Equity incentives; corporate; overconfidence; management; Forecast; rewards; COSTS

摘要

This paper investigates whether maintaining a reputation for consistently beating analysts' earnings expectations can motivate executives to move from within GAAP earnings management to outside of GAAP earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms consistently beat analysts' quarterly earnings forecasts in the three years prior to the manipulation period and continue to do so by smaller beats during the manipulation period. We find that manipulating firms beat expectations around 86 percent of the time in the 12 quarters prior to the manipulation period (versus 75 percent for control firms) and that manipulation often ends with a miss in expectations. We document that executives of manipulating firms face strong stock market and CEO pressure to perform. Prior to the manipulation period, these firms have high analyst optimism, growing institutional interest, and high market valuations, along with powerful CEOs. Further, we find that maintaining a reputation for beating expectations is more important than CEO overconfidence and is incremental to CEO equity incentives for explaining manipulation. Our results suggest that pressure to maintain a reputation for beating analysts' expectations can encourage aggressive accounting and, ultimately, earnings manipulation.