Would Managers Sacrifice Conservative Financial Reporting to Meet/Beat Market Earnings Expectations?

Anthony C. Ng, Hua Christine Xin () and Bikki Jaggi
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Anthony C. Ng: Faculty of Business and Economics, The University of Melbourne, Parkville, VIC 3010, Australia
Hua Christine Xin: Mitchell College of Business, University of South Alabama, Mobile, AL 36688, USA
Bikki Jaggi: Rutgers Business School, Rutgers University, Newark, NJ 07102, USA

JRFM, 2024, vol. 17, issue 7, 1-33

Abstract: Prior studies show that engaging in conservative financial reporting (CON) positively affects earnings quality. However, managers also manage earnings to meet/beat market earnings expectations (MBME). This study asks three questions regarding the earnings that MBME. First, it investigates whether managers are willing to sacrifice CON when adopting strategies to MBME. Second, it tests whether managers prefer to use other earnings management (EM) strategies to MBME instead of sacrificing CON. Third, it tests whether information asymmetry between managers and shareholders affects managers’ decisions to sacrifice CON. Results show that managers are more likely to sacrifice CON to MBME but are less likely to do so if they can manage earnings using accrual-based or real EM. Also, managers are more likely to do so when information asymmetry with shareholders is higher. These findings contribute to the literature by examining the circumstances in which managers would sacrifice CON to MBME.

Keywords: meet/beat analysts’ forecasts; accounting conservatism; managerial entrenchment; earnings management; information asymmetry (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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