
Management Earnings Forecast And Earnings Management: Does Prior-Period Forecast Accuracy Play A Role?
Author(s) -
Jingwen Yang
Publication year - 2013
Publication title -
journal of business and economics research
Language(s) - English
Resource type - Journals
eISSN - 2157-8893
pISSN - 1542-4448
DOI - 10.19030/jber.v11i3.7666
Subject(s) - pessimism , earnings , reputation , economics , accrual , monetary economics , demographic economics , econometrics , accounting , political science , philosophy , epistemology , law
This study aims at examining 1) whether the market reacts differently in response to the same news, but based on different levels of accuracy from prior earnings forecasts; 2) whether managers tend to maintain or change their reputations for being optimistic or pessimistic in their forecasts; and 3) whether managers manage current earnings numbers in order to maintain or change their reputations for optimistic or pessimistic forecasting. Based on t-tests and the Wilcoxon rank-signed test, it was discovered that the market reacts more positively (negatively) on good (bad) news with a pessimistic (optimistic) prior earnings forecast. Further, when a firm is pessimistic in its forecasts, it tends to stay pessimistic, but when a firm has a reputation for optimistic forecasts, it does not appear to change that reputation. A firm with an optimistic prior forecast is more likely to manage earnings upwards by influencing one of the following: increasing total accruals, boosting inventory levels, or lowering discretionary expenses.