How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts

Abe Jong (), Gerard Mertens (), Marieke Poel () and Ronald Dijk ()
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Abe Jong: Erasmus University
Gerard Mertens: Open Universiteit Nederland
Marieke Poel: Erasmus University
Ronald Dijk: APG Asset Management

Review of Accounting Studies, 2014, vol. 19, issue 2, No 3, 606-627

Abstract: Abstract Survey evidence shows CFOs to believe that earnings management can enhance investor valuation of their firms. This evidence raises the question of correspondence between the beliefs of CFOs and investors. Surveying financial analysts to gain insight into how earnings management influences investor perception of firm value, we find analysts’ and CFOs’ beliefs to be generally consistent. We find that analysts perceive meeting earnings benchmarks and smoothing earnings to enhance investor perception of firm value and all earnings management actions to reach a benchmark, save share repurchases, to be value destroying. CFOs, however, are reluctant to repurchase shares, preferring to use techniques viewed by analysts as value destroying (e.g., reductions in discretionary spending). Analysts’ inability to unravel such techniques perhaps explains CFOs’ preferences.

Keywords: Financial reporting; Earnings management; Earnings benchmark; Earnings smoothing; Financial analysts; Financial executives (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11142-013-9250-y

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