Management of Reported and Forecast EPS, Investor Responses, and Research Implications

Foong Soon Cheong () and Jacob Thomas ()
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Foong Soon Cheong: New York University Shanghai, Shanghai 200122, China
Jacob Thomas: Yale School of Management, Yale University, New Haven, Connecticut 06520

Management Science, 2018, vol. 64, issue 9, 4277-4301

Abstract: We document substantial management of reported and forecast earnings per share (EPS) for analyst-followed U.S. firms, with the extent of management increasing with share price. Managers smooth the volatility of reported EPS by using accruals to offset cash flow shocks. Smoother EPS is easier to forecast, resulting in smaller forecast errors. Managers also differentially guide forecasts to improve accuracy. Whereas unmanaged forecast errors are much larger for high-price firms, they are compressed to the point their magnitudes resemble those for low-price firms. Managers also guide analyst forecasts to generate patterns of forecast walkdowns that again vary with share price. Given the remarkable level of management implied by our results, we conduct additional robustness analyses. The strongest evidence is observed in stock price responses: investors recognize efforts to manage reported and forecast EPS and adjust accordingly. We highlight potential biases caused by researchers being unaware of managerial efforts and investor responses, and offer ways to mitigate those biases.

Keywords: EPS forecast errors; earnings management; forecast guidance; scale deflation; earnings response coefficients (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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