Short-term earnings guidance and accrual-based earnings management

Andrew C. Call (), Shuping Chen, Bin Miao and Yen H. Tong
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Andrew C. Call: Arizona State University
Shuping Chen: University of Texas at Austin
Bin Miao: National University of Singapore
Yen H. Tong: Nanyang Technological University

Review of Accounting Studies, 2014, vol. 19, issue 2, No 13, 955-987

Abstract: Abstract Motivated by recent practitioners’ concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate these findings by documenting that earnings guidance either has no impact on or mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.

Keywords: Earnings guidance; Management forecasts; Earnings management; Abnormal accruals; Discretionary revenues (search for similar items in EconPapers)
JEL-codes: M40 M41 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11142-013-9270-7

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