Review of Accounting Studies

, Volume 15, Issue 4, pp 808–832

The use of advertising activities to meet earnings benchmarks: evidence from monthly data

Authors

  • Daniel Cohen
    • Stern School of BusinessNew York University
  • Raj Mashruwala
    • College of Business AdministrationUniversity of Illinois at Chicago
    • Fisher College of BusinessThe Ohio State University
Article

DOI: 10.1007/s11142-009-9105-8

Cite this article as:
Cohen, D., Mashruwala, R. & Zach, T. Rev Account Stud (2010) 15: 808. doi:10.1007/s11142-009-9105-8

Abstract

Using a unique database of monthly media advertising spending, we examine whether managers engage in real earnings management to meet quarterly financial reporting benchmarks. We extend prior literature by (1) separately analyzing advertising activities, allowing us to explore the possibility that managers could reduce or boost advertising to meet benchmarks; (2) analyzing actual activities as opposed to inferring them from reported expenses, which are also subject to accrual choices; (3) investigating the timing, within a quarter, of altered advertising spending; and (4) examining quarterly earnings benchmarks. We find that managers, on average, reduce advertising spending to avoid losses and earnings decreases. However, we also report that firms in the late stages of their life cycle increase advertising to meet earnings benchmarks. Finally, we find some evidence that firms increase advertising in the third month of a fiscal quarter and in the fourth quarter to beat prior year’s earnings.

Keywords

Real earnings managementAdvertisingEarnings benchmarks

JEL Classification

M41M432G38

Copyright information

© Springer Science+Business Media, LLC 2009