Peer performance and earnings management

Qianqian Du and Rui Shen

Journal of Banking & Finance, 2018, vol. 89, issue C, 125-137

Abstract: This paper studies how peer performance affects firms’ earnings management decisions. Using peer firms’ idiosyncratic returns as an exogenous peer performance measure and the instrumental variable approach, we find that higher peer performance leads to higher discretionary accruals. This effect is salient for both industry leaders and followers and is robust to alternative discretionary accrual measures and alternative peer definitions. We examine two mechanisms through which peer performance affects firms’ earnings management. We find that analysts revise their earnings forecasts according to peer performance and that when peer performance is higher, firms are less likely to meet or beat analyst consensus without managing earnings. This evidence suggests a capital market pressure mechanism. In addition, the effect of peer performance is more pronounced in firms using relative performance evaluation, suggesting a compensation pressure mechanism. In sum, our evidence suggests that managers report opportunistically to match peer performance.

Keywords: Peer performance; Earnings management; Capital market pressure; Relative performance evaluation (search for similar items in EconPapers)
JEL-codes: G10 M41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:89:y:2018:i:c:p:125-137

DOI: 10.1016/j.jbankfin.2018.01.017

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