Are all management earnings forecasts created equal? Expectations management versus communication

Are all management earnings forecasts created equal? Expectations management versus communication Recent studies associate management earnings forecasts (MEFs) with expectations management. These studies, however, neither provide evidence on the extent and scope of expectations management through MEFs nor consider alternative incentives for issuing MEFs. Consequently, existing evidence does not help regulators assess whether MEFs effectively facilitate communication with investors. We investigate to what extent managers exploit their earnings forecasts as a tool of expectations management or as a communication device. By examining relations among MEFs, analysts’ forecasts, and actual earnings, we classify MEFs into three incentive categories: (1) expectations management, (2) communication, and (3) other incentives. We find that a significant proportion (approximately 45%) of MEFs is issued to convey accurate earnings information to the market (that is, communication incentive). We also find that the fraction of MEFs for the expectations-management incentive increases post-Regulation Fair Disclosure. The evidence from examination of the various managerial motives for each incentive category supports our classification. Additional analysis using alternative classifications based on bad/good news and pessimistic/optimistic forecasts reveals that our proposed classification of MEFs works better in defining expectations management than these other classifications. This implies that more caution is warranted in defining expectations management when investigating the association between managerial motives and incentives for issuing MEFs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Are all management earnings forecasts created equal? Expectations management versus communication

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Publisher
Springer Journals
Copyright
Copyright © 2011 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-011-9178-z
Publisher site
See Article on Publisher Site

Abstract

Recent studies associate management earnings forecasts (MEFs) with expectations management. These studies, however, neither provide evidence on the extent and scope of expectations management through MEFs nor consider alternative incentives for issuing MEFs. Consequently, existing evidence does not help regulators assess whether MEFs effectively facilitate communication with investors. We investigate to what extent managers exploit their earnings forecasts as a tool of expectations management or as a communication device. By examining relations among MEFs, analysts’ forecasts, and actual earnings, we classify MEFs into three incentive categories: (1) expectations management, (2) communication, and (3) other incentives. We find that a significant proportion (approximately 45%) of MEFs is issued to convey accurate earnings information to the market (that is, communication incentive). We also find that the fraction of MEFs for the expectations-management incentive increases post-Regulation Fair Disclosure. The evidence from examination of the various managerial motives for each incentive category supports our classification. Additional analysis using alternative classifications based on bad/good news and pessimistic/optimistic forecasts reveals that our proposed classification of MEFs works better in defining expectations management than these other classifications. This implies that more caution is warranted in defining expectations management when investigating the association between managerial motives and incentives for issuing MEFs.

Journal

Review of Accounting StudiesSpringer Journals

Published: Nov 30, 2011

References

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