How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts
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Survey evidence shows CFOs to believe that earnings management can enhance investor valuation of their firms. This evidence raises the question of correspondence between the beliefs of CFOs and investors. Surveying financial analysts to gain insight into how earnings management influences investor perception of firm value, we find analysts’ and CFOs’ beliefs to be generally consistent. We find that analysts perceive meeting earnings benchmarks and smoothing earnings to enhance investor perception of firm value and all earnings management actions to reach a benchmark, save share repurchases, to be value destroying. CFOs, however, are reluctant to repurchase shares, preferring to use techniques viewed by analysts as value destroying (e.g., reductions in discretionary spending). Analysts’ inability to unravel such techniques perhaps explains CFOs’ preferences.
KeywordsFinancial reporting Earnings management Earnings benchmark Earnings smoothing Financial analysts Financial executives
We thank Anna Gold, Alan Goodacre, Reggy Hooghiemstra, Nancy Huyghebaert, Teye Marra, Marlene Plumlee, Shiva Rajgopal, Rui Shen, Mathijs van Dijk, Marcel van Rinsum, Yulia Veld-Merkoulova, and seminar participants at K. U. Leuven, Rotterdam School of Management Erasmus University, University of Antwerp, University of Groningen, and University of Stirling for helpful comments. We are grateful to John Graham, Campbell Harvey, and Shiva Rajgopal for providing their CFO survey data to us. Finally, we are grateful to the financial analysts who took the time to fill out our survey or to be interviewed by us. The paper was previously entitled “The demand for corporate financial reporting: a survey among financial analysts”.
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