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We investigate whether a disaggregated earnings forecast enables investors to detect management’s myopic behaviors. Our experimental results show that investors attend to the different levels of discretion management has over expense items and react differently depending on whether earnings forecast are missed or exceeded. Specifically, when reported income exceeds management forecast, investors downgrade firms that reduce R&D expenses when compared with firms whose income surplus is attributed to lower COS. On the other hand, investors react more positively to companies with an increase in R&D expense even though the reported income falls short of earnings forecast when compared with those having the same income shortfall which is attributable to increases in COS. Implications are discussed.
Lei Dong, Washington State University
Bernard Wong-On-Wing, Washington State University
Gladie Lui, Lingnan University