To What Extent Does the Financial Reporting Process Curb Earnings Surprise Games?

Managers play earnings surprise games to avoid negative earnings surprises by managing earnings upward or by managing analysts' earnings expectations downward. We investigate the effectiveness of the financial reporting process at restraining earnings surprise games. Because the annual reportin...

Full description

Saved in:
Bibliographic Details
Published inJournal of accounting research Vol. 45; no. 5; pp. 947 - 981
Main Authors BROWN, LAWRENCE D., PINELLO, ARIANNA SPINA
Format Journal Article
LanguageEnglish
Published Malden, USA Blackwell Publishing Inc 01.12.2007
Blackwell Publishing
Wiley Blackwell
Blackwell Publishing Ltd
SeriesJournal of Accounting Research
Subjects
Accounting research
Analytical forecasting
Business accounting
Creative accounting
Earnings
Earnings forecasting
Earnings management
Economic efficiency
Financial accounting
Financial analysis
Financial information
Financial management
Financial regulation
Financial reporting
Forecasting models
Logistic regression
Modeling
Proxy reporting
Proxy statements
Variable coefficients
Online AccessGet full text

Cover

More Information
Summary:Managers play earnings surprise games to avoid negative earnings surprises by managing earnings upward or by managing analysts' earnings expectations downward. We investigate the effectiveness of the financial reporting process at restraining earnings surprise games. Because the annual reporting process is subject to an independent audit and more rigorous expense recognition rules than interim reporting, it provides managers with fewer opportunities to manage earnings upward. We document that, relative to interim reporting, annual reporting reduces the likelihood of income-increasing earnings management and, to a lesser extent, of negative surprise avoidance, but increases the magnitude of downward expectations management. Our findings suggest that regulatory attempts to monitor corporations' internal checks and balances are likely to be more effective at curbing upward earnings management than at mitigating negative surprise avoidance.
Bibliography:ark:/67375/WNG-3QMN46QT-L
istex:44943CA4E1DE6FA275B01EF865F1E607746E9793
ArticleID:JOAR256
We appreciate the helpful comments of Linda Bamber, Eli Bartov, Sudipta Basu, Artur Hugon, Maria Ogneva, Abbie Smith, an anonymous reviewer, workshop participants at Florida State University, Southern Methodist University, and University of Georgia, and attendees of our sessions at the 2005 American Accounting Association Annual Meeting and the 2006 FARS Midyear Meeting. We thank Marcus Caylor and Liyu Luo for research assistance and Thomson Financial Inc. for providing us access to analyst forecast data. This research was supported, in part, by a research grant from the J. Mack Robinson College of Business, Georgia State University. We dedicate our paper to the memory of our friend and colleague Walt Blacconiere.
ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 14
content type line 23
ISSN:0021-8456
1475-679X
DOI:10.1111/j.1475-679X.2007.00256.x