Prior research suggests that achieving a string of consecutive positive earnings surprises (an earnings string) is associated with a higher market valuation. However, results are unclear on the role of earnings manipulation in achieving such strings. We document that a high proportion of firms that have unambiguously manipulated earnings (firms subject to SEC enforcement actions) have positive earnings strings. This suggests that earnings manipulation plays a role in string formation and the related valuation premium. Further tests suggest that managers manipulate earnings to report positive earnings strings in order to maintain their firms’ valuation premium rather than to earn the valuation premium. Additional analyses suggest that (i) achieving earnings strings through earnings manipulation is short-lived and lasts only up to two years; (ii) managers are more prone to manipulate earnings to consistently beat analyst forecasts than to consistently beat previously reported earnings; (iii) earnings are not manipulated in order for managers to consistently beat their own guidance.
| Speaker: | Dr Jenny Chu Lecturer in Accounting, University of Cambridge |
| When: |
3.30 - 5.00pm |
| Venue: | School of Accountancy Level 3, Seminar Room 3.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |