Analysts’ Long-Term Forecasts and Real Earnings Management

• In Event: Earnings Management and Professional Judgment

Abstract

This research work investigates the implications of earnings manipulations through real earnings management (REM). In particular, it examines the extent to which analysts interpret the effects of REM on upcoming earnings when they put forth long-term earnings growth projections. Our results show that, overall, analysts issue lower long-term earnings forecasts regarding growth for corporations that display greater levels of REM. In addition, we find that analysts’ long-term earnings forecast bias increases with the level of REM. Our results of sensitivity tests confirm our findings that financial analysts are able to recognize REM and penalize firms that engage in it by issuing overall lower long-term forecasts.

Authors

• Linxiao Liu, University of West Georgia

• Wael Aguir, University of Texas Rio Grande Valley-Edinburg

• Carroll Griffin, Georgia Gwinnett College

• Zhenfeng Liu, University of Michigan-Flint