Abstract
This study examines whether management uses discretionary accounting accruals to move earnings upward toward analysts' earnings forecasts when it appears that earnings before discretionary accruals will fall short of the forecast. An earnings shortfall relative to analysts' forecasts could lead management to fear lower compensation and an increase in the likelihood of job termination. The article finds that firms whose earnings before discretionary accruals are below analysts' forecasts use income-increasing discretionary accruals and do so to a greater extent than do firms whose earnings before discretionary accruals are above analysts' forecasts.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Baiman, S., J. H. EvansIII, and J. Noel, “Optimal Contracts with a Utility-Maximizing Auditor.” Journal of Accounting Research 25, 217–244, (Autumn 1987).
Beatty, R., and R. Verrecchia, “The Effect of a mandated Accounting Change on the Capitalization Process,” Contemporary Accounting Research 5, 472–493, (1989).
Cohen, L., “‘Low-Balling’: How Some Companies Send Stocks Aloft,” Wall Street Joural, C1, (May 6, 1991).
DeAngelo, L., “Managerial Competition, Information Costs, and Corporate Governance: The use of Accounting Performance Measures in Proxy Contests,” Journal of Accounting and Economics 10, 3–36, (January 1988).
DeAngelo, L., “Accounting Numbers as Market Valuation Substitutes: A Study of Management Buyouts of Public Stockholders,” Accounting Review 61, 400–420, (July 1986).
Dye, R. A., “Earnings Management in an Overlapping Generations Model,” Journal of Accounting Research 26, 195–235, (Autumn 1988).
Easton, P., and M. Zmijewski, “Cross-Sectional Variation in the Stock Market Response to Accounting Earnings Announcements,” Journal of Accounting and Economics 11, 117–141, (July 1989).
Foster, G., C. Olsen, and T. Shevlin, “Earnings Releases, Anomalies, and the Behavior of Security Returns,” Accounting Review 59, 574–603, (October 1984).
Gordon, M. J., “Postulates, Principles and Research in Accouting,” Accounting Review 39, 251–263, (April 1964).
Healy, P., “The Effect of Bonus Schemes on Accounting Decisions,” Journal of Accounting and Economics 7, 85–107, (April 1985).
Holthausen, R. W., and R. W. Leftwich, “The Economic Consequences of Accounting Choice: Implications of Costly Contracting and Monitoring,” Journal of Accounting and Economics 5, 77–117, (August 1983).
Jones, J., “Earnings Management During Import Relief Investigations,” Journal of Accounting Research 29, 193–228, (Autumn 1991).
Kim, K., and D. A. Schroeder, “Analysts' Use of Managerial Bonus Incentives in Forecasting Earnings,” Journal of Accounting and Economics 13, 3–23, (May 1990).
Lees, F., Public Disclosure of Corporate Earnings Forecasts. New York: Conference Board, 1981.
Maddala, G. S., Econometrics. New York: McGraw-Hill, 1977.
McNichols, M., and G. P. Wilson, “Evidence of Earnings Management from the Provision for Bad Debts,” Journal of Accounting Research 26, 1–31, (Supplement 1988).
Penno, M., “Accrual Accounting in a Principal-Agent Setting,” Working Paper, University of Chicago, 1987.
Philbrick, D., and W. Ricks, “Using Value Line and IBES Analyst Forecasts in Accounting Research,” Journal of Accounting Research 29, 397–417, (Autumn 1991).
Schipper, K., “Commentary on Earnings Management,” Accounting Horizons 3, 91–102, (December 1989).
Soo, B., “Managerial Response to Mandatory Accounting Principles: An Accruals Perspective,” Working Paper, Northwestern University, 1990.
Stickney, C. P., and V. E. McGee, “Effective Corporate Tax Rates: The Effect of Size, Capital Intensity, Leverage, and Other Factors,” Journal of Accounting and Public Policy 1, 125–152, (Winter 1982).
Warner, J. B., R. L. Watts, and K. H. Wruck, “Stock Prices and Top Management Changes,” Journal of Financial Economics 20, 461–492, (January/March 1988).
Weisbach, M. S., “Outside Directors and CEO Turnover,” Journal of Financial Economics 20, 431–460, (January/March 1988).
Zmijewski, M. E., and R. L. Hagerman, “An Income Strategy Approach to the Positive Theory of Accounting Standard Setting/Choice,” Jounral of Accounting and Economics 3, 129–149, (August 1981).
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Bannister, J.W., Newman, H.A. Accrual usage to manage earnings toward financial analysts' forecasts. Rev Quant Finan Acc 7, 259–278 (1996). https://doi.org/10.1007/BF00245253
Issue Date:
DOI: https://doi.org/10.1007/BF00245253