Short-term earnings guidance and accrual-based earnings management
Call, Andrew C.
Tong, Yen H.
Date of Issue2014
College of Business (Nanyang Business School)
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.
Review of accounting studies
© 2014 Springer Science+Business Media New York. This is the author created version of a work that has been peer reviewed and accepted for publication by Review of Accounting Studies, Springer Science+Business Media New York. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [DOI: http://dx.doi.org/10.1007/s11142-013-9270-7].