Do Investors Unravel Earnings Management to Meet or Narrowly Beat Analysts’ Expectations? Evidence from Conference Calls

• In Event: Forecasts and Analysts

Abstract

We examine whether the textual content of conference calls can be used to identify firms that likely manage earnings to meet or narrowly beat analysts’ expectations. We find a positive association between the number of mentions of G&A, R&D, and tax expenses in the Q&A session of conference calls and the likelihood of meeting or just beating analysts’ expectations. We also find that increased mentions of those expenses is associated with lower market reaction and downward revisions to analysts’ earnings estimates, but only for firms that meet or just beat analysts’ expectations. We further find a positive association between the number of mentions of R&D, G&A, and tax expenses in the Q&A section of conference calls and the future increase in those expenses for firms that meet or narrowly beat analysts’ expectations. Lastly, we find a positive association between the number of mentions of taxes and R&D and bid-ask spreads around the conference calls for firms that meet or narrowly meet analysts’ expectations. Our results suggest that investors identify when firms use R&D, G&A, and taxes to meet or narrowly beat analysts’ expectations and to update their expectations accordingly.

Authors

• Yuan Ji, Hong Kong Polytechnic University

• Oded Rozenbaum, George Washington University