Short-term earnings guidance and accrual-based earnings management
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Motivated by recent practitioners’ concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate these findings by documenting that earnings guidance either has no impact on or mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.
KeywordsEarnings guidance Management forecasts Earnings management Abnormal accruals Discretionary revenues
JEL ClassificationM40 M41
We thank Patricia Dechow (editor) and two anonymous reviewers for their comments and guidance. In addition, we thank Bruce Billings, Rebecca Hann, Frank Heflin, John Jiang (discussant at the 21st Annual Conference on Financial Economics and Accounting, University of Maryland), Steve Kachelmeier, Bill Kinney, Ramgopal Venkataraman (discussant at the 2011 FARS Midyear Conference), and workshop participants at Georgetown University, Florida State University, Hong Kong University of Science and Technology, and the University of Rochester, and brownbag participants at the University of Texas at Austin for helpful comments. All errors are our own.
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