Earnings Management and Uncertainty of Analyst Forecasts
Date Issued
2009
Date
2009
Author(s)
Wen, Pei-Chun
Abstract
According to prior research, Managers’ use of discretionary accruals for earnings management might reduce the accruals quality, which in turn results into lower earnings quality. In addition, low earnings quality is then negatively priced by the market, because poor quality increases investors’ information risk of predicting future cash flows.ifferent from native investors, financial analysts are usually deemed as sophisticated investors. Thus, while the market pricing of earnings quality has been documented in the capital market literature, this study investigates whether analyst forecasts will be affected by the low earnings quality that is intentionally created by the management. This study uses the empirical proxies, the precision of public information, the precision of private information, forecast dispersion and squared errors, for analysts’ uncertainty in earnings forecasts as suggested by Barron et al. (1998). Then we examine the effect of earnings management on the empirical proxies for analysts’ uncertainty in earnings forecasts.his study uses modified Jones model to calculate discretionary accruals, our proxy for the earnings management. We obtain actual and forecast annual EPS value for the years 2003 through 2007 from I/B/E/S.he empirical results showed that there is no correlation between earnings management and the empirical proxies for analysts’ uncertainty in earnings forecasts. That is, earnings management neither increases nor decreases analysts’ uncertainty in earnings forecasts because analysts are sensible.
Subjects
Earnings Management
Precision of Public Information
Precision of Private Information
Forecast Dispersion
Forecast Dispersion/Uncertainty Ratio
Squared Errors
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