Review of Accounting Studies

, Volume 15, Issue 4, pp 808–832 | Cite as

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

  • Daniel Cohen
  • Raj Mashruwala
  • Tzachi Zach


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.


Real earnings management Advertising Earnings benchmarks 

JEL Classification

M41 M432 G38 



We gratefully acknowledge the financial support of the Center for Research in Economics and Strategy at the Olin Business School. We have benefited from the comments of two anonymous referees, Eli Bartov, Anne Beatty, Messod Beneish, Larry Brown, Donal Byard, Sandra Chamberlain (FARS discussant), Masako Darrough, Richard Dietrich, Nick Dopuch, Peter Easton, Richard Frankel, James Hansen, Steve Huddart, Bjorn Jorgensen, April Klein, Andy Leone, Fred Lindahl, Thomas Lys, Christina Mashruwala, Shamin Mashruwala, Brian Miller, Doron Nissim, Shail Pandit, Sugata Roychowdhury, Kristi Schneck, Ram Venkataraman, Xin Wang, Joe Weber, TJ Wong, Minlei Yei (AAA discussant), Amy Zang (CFEA discussant), Paul Zarowin, Jerry Zimmerman, participants at the 2008 FARS conference, the 2008 AAA annual meeting, the 2007 Conference of Financial Economics and Accounting, the 2007 Nick Dopuch Conference, and workshop participants at University of Arizona, Baruch College, University of Chicago, Chinese University of Hong Kong, Columbia University, Georgia State University, George Mason University, George Washington University, IDC Herzliya, INSEAD, University of Illinois at Chicago, University of Illinois at Urbana-Champaign, University of Maryland, University of Miami, The Ohio State University, Penn State University, Southern Methodist University, Stanford University, University of Technology Sydney, and Washington University in St. Louis.


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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Stern School of BusinessNew York UniversityNew YorkUSA
  2. 2.College of Business AdministrationUniversity of Illinois at ChicagoChicagoUSA
  3. 3.Fisher College of BusinessThe Ohio State UniversityColumbusUSA

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