The Impact Of Earnings Management And Expectations Management On The Usefulness Of Earnings And Analyst Forecasts In Firm Valuation PDF Download

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The Impact of Earnings Management and Expectations Management on the Usefulness of Earnings and Analyst Forecasts in Firm Valuation

The Impact of Earnings Management and Expectations Management on the Usefulness of Earnings and Analyst Forecasts in Firm Valuation
Author: Yao Tian
Publisher:
Total Pages: 109
Release: 2007
Genre: Business forecasting
ISBN: 9780494433577
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In this dissertation, I examine the impact of earnings management and expectations management on the usefulness of earnings and analyst forecasts in firm valuation. Earnings and analyst forecasts are important inputs into accounting valuation models. Their ability to reflect current and predict future firm performance can help valuation models predict intrinsic value. However, increasing earnings management and expectations management activities in recent years may have adversely affected the usefulness of these information items in firm valuation. This study shows that intrinsic value metrics estimated using manipulated earnings or forecasts have less ability to track stock prices and predict future returns through V/P ratios, providing evidence for the joint hypothesis of (i) long-term market efficiency and (ii) the negative impact of earnings management and expectations management on the usefulness of earnings and analyst forecasts in firm valuation. It contributes to the accounting literature in several ways. First, it challenges the conventional view that more accurate and less biased forecasts are necessarily of better quality and proposes to assess the quality of analyst forecasts directly by examining their usefulness. It also introduces an improved measure for expectations management and presents new evidence on (i) the usefulness of earnings and analyst forecasts in firm valuation; (ii) the negative impacts of earnings management and expectations management on this usefulness; and (iii) the overall performance of accounting valuation models in firm valuation.

Analytical Approach to Investing Research - Removing the Management Fluff

Analytical Approach to Investing Research - Removing the Management Fluff
Author: Ph. D. Pat O'Leary
Publisher: Totalrecall Publications
Total Pages: 124
Release: 2009-03-01
Genre: Business & Economics
ISBN: 9780970468444
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Analytical approach to Investing Research A Market Insiders Analytical Approach Removes Management Fluff to Help Predict Forward Pricing and Valuation Based on Solid Principles That Can Be Quantified The earnings management and expectations management directly impacts the analytical forecasts in firm evaluation. Earnings and analyst forecasts are important inputs into accounting valuation models to reflect current and predict future firm performance. These models help predict the intrinsic value, however in recent years may have adversely affected the usefulness of the information. This book is meant to show that intrinsic value metrics estimated using manipulated earnings or forecasts have less ability to track stock prices and predict future returns. The usefulness of earnings and analyst forecasts provide evidence for the joint hypothesis of (i) long-term market efficiency and (ii) the negative impact of earnings management and expectations management i.e. Removing The Management Fluff. First, it challenges the conventional view that more accurate and less biased forecasts are necessarily of better quality and proposes to assess the quality of analyst forecasts. It also introduces an improved measure for expectations management and presents new evidence on (i) the usefulness of earnings and analyst forecasts in firm valuation; (ii) the negative impacts of earnings management and expectations management on this usefulness; and (iii) the overall performance of accounting valuation models in firm valuation. Dr. Pat OLeary, Ph.D. Accounting MBA, CMA, CFM, CNE, B. Commerce Born in Brantford, Ontario, Canada, Pat has always been motivated to succeed and dedicated to getting the best formal financial education possible, as evidenced by his many degrees and certifications. As he rose through the ranks in the corporate world, he gained extensive experience in corporate structuring, mergers, IPOs, international finance, foreign exchange, and manufacturing. His impressive educational background and financial experience have blended to form the analytical and practical approach to investing research that he presents in this book.

The Impact of Earnings Management on the Performance of Earnings-Based Valuation Models

The Impact of Earnings Management on the Performance of Earnings-Based Valuation Models
Author: Yao Tian
Publisher:
Total Pages: 0
Release: 2013
Genre:
ISBN:
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The purpose of this study is to examine empirically how the presence of earnings management may affect firm valuation. We compare the performance of earnings-based (e.g., Residual Income Model, RIM) and non-earnings-based (e.g., Discounted Cash Flow, DCF) valuation models, measured by absolute percentage pricing errors and absolute percentage valuation errors, for two subsets of publicly traded US firms: "Suspect" firms that are likely to have engaged in earnings management and “Normal” firms matched on industry, year and size. When valuation models use only analysts' short-term earnings forecasts as model inputs, results indicate that earnings management adversely affects the RIM model's ability to estimate a firm's intrinsic value while leaving that of DCF unchanged. We contribute to the valuation literature by showing that the well-known superiority of the RIM model over DCF does not hold when earnings are managed. By comparison, if the valuation model also includes analysts' long-term target price forecasts, RIM does not enjoy any economically significant accuracy advantage over DCF, with or without the presence of earnings management. Over a longer forecast horizon, financial analysts appear to account for the impact of earnings management on firms' future values by adjusting their target price forecasts. We extend the earnings management literature by demonstrating that the way analysts react to earnings management over short to long-term forecast horizons has different implications for the estimation ability of RIM vis-à-vis DCF models.

Outperform with Expectations-Based Management

Outperform with Expectations-Based Management
Author: Tom Copeland
Publisher: John Wiley & Sons
Total Pages: 295
Release: 2011-09-28
Genre: Business & Economics
ISBN: 111816105X
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CEOs and managers live and die by delivering superior performance to shareholders. This is why expectations-based management has been developed. Outperform with Expectations-Based Management (EBM) introduces a revolutionary new performance metric that links performance standards, performance measurement, and the achievement of performance. It's easy to say that if a CEO can get performance measurement right, then performance improvement will follow. But what is the "right" measure of performance, and how do you use it to improve performance? Authors Tom Copeland and Aaron Dolgoff answer these questions and many more, as they show you how to find the measure of performance that has the strongest link to the creation of wealth for the owners of both public and private companies. They answer the puzzle of why growth in earnings is not correlated with shareholder returns and explain the under- and over-investment traps. And they explain how clear communications to investors and managers alike improve value. The bottom line is that share prices go up when companies exceed expectations -- short-term and long-term -- of income statement and balance sheet performance and daily operating value drivers. Gain a complete understanding of EBM and discover how to do this, and much more, while staying competitive in an unforgiving business environment.

Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality

Earnings Management. The Influence of Real and Accrual-Based Earnings Management on Earnings Quality
Author:
Publisher: GRIN Verlag
Total Pages: 81
Release: 2024-01-31
Genre: Business & Economics
ISBN: 3964875953
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Master's Thesis from the year 2019 in the subject Business economics - Accounting and Taxes, University of Duisburg-Essen, course: Master Thesis, language: English, abstract: This paper delves into various theories and approaches, aiming to define and differentiate earnings management from related concepts such as fraud, expectation management, and impression management. It explores the goals and incentives driving earnings management, including maximizing or minimizing earnings, beating targets, and smoothing. At the onset of the new millennium, corporate scandals rocked the business world, eroding trust in management, boards of directors, and the accounting profession. In response, regulations and policies aimed at enhancing corporate governance and financial reporting were swiftly implemented. The credibility, clarity, and consistency of financial reporting practices play a pivotal role in enabling investors to make informed decisions. Accurate and fair financial performance representations, as opposed to inflated and misleading figures, are essential for market players, including shareholders and creditors. Investors rely on audited financial reports to guide their investment decisions, underscoring the critical importance of accuracy and reliability in publicly available financial disclosures. Auditors, by reducing the risk of material misstatement, ensure the integrity of the information disclosed in a company's financial statements. Management, with the goal of achieving promised targets and ensuring the company's existence, may engage in earnings management as a strategic contribution to corporate policy. Financial reporting serves as a means to distinguish well-performing companies from their counterparts, facilitating efficient resource allocation and empowering stakeholders to make effective decisions. The disclosed earnings results significantly impact a firm's overall business activities and management decisions, particularly in satisfying analysts' expectations, which can influence equity value. While accounting standards play a role, the quality of financial statements is more influenced by company-specific and institutional factors shaping managers' incentives. These factors lead to financial reporting practices being viewed as the outcome of a cost-benefit assessment.

Does Expectations Management Impair the Usefulness of Analyst Forecasts in Firm Valuation?

Does Expectations Management Impair the Usefulness of Analyst Forecasts in Firm Valuation?
Author: Yao Tian
Publisher:
Total Pages: 36
Release: 2007
Genre:
ISBN:
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In this paper, I examine how expectations management for the purpose of meeting or beating analyst expectations (MBE) impairs the ability of analyst forecast-based valuation models to predict firms' intrinsic values. I predict that management's manipulation of analyst expectations introduces error in analyst forecasts and reduces their ability to proxy future expected earnings; consequently, valuation models estimated using these manipulated forecasts have less ability than those estimated using non-manipulated forecasts to predict firms' true intrinsic values. The results show that, consistent with my prediction, intrinsic value metrics estimated using manipulated forecasts have less ability to track stock price (as evidenced by their lower correlation with stock prices and less stationary V/P time-series) and to predict future returns. These results provide consistent evidence for the negative impact of expectations management on the ability of accounting valuation models to predict firm value. This study contributes to the literature in two major respects: (i) it introduces an improved measure of expectations management to MBE; and (ii) it proposes expectations management (forecast manipulation) as a new determinant of the ability of accounting valuation models to predict firm value.

Earnings Management

Earnings Management
Author: Jeff L. Payne
Publisher:
Total Pages:
Release: 1998
Genre:
ISBN:
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This paper examines the utilization of discretionary accruals to adjust reported earnings toward analysts' expectations regarding firm profitability. The variance in analysts' earnings forecasts is used as our firm specific measure for analysts' forecasts consensus. Our findings indicate that managers use discretionary accruals to achieve market expectations for earnings. Managers behave as though they have greater incentives to use income increasing discretionary accruals in settings where analysts have reached a consensus regarding firm earnings, particularly in settings where pre-discretionary accrual earnings are below analysts' expectations. When pre-discretionary accrual earnings are above analysts' expectations and analysts are not in consensus, managers use strategies to retain their ability to manage (increase) earnings in future periods by recording income decreasing discretionary accruals in the current period. Two alternative specifications to control for possible measurement error in our design produced results consistent with our primary analysis.

Financial Analysts' Forecasts and Stock Recommendations

Financial Analysts' Forecasts and Stock Recommendations
Author: Sundaresh Ramnath
Publisher: Now Publishers Inc
Total Pages: 125
Release: 2008
Genre: Business & Economics
ISBN: 1601981627
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Financial Analysts' Forecasts and Stock Recommendations reviews research related to the role of financial analysts in the allocation of resources in capital markets. The authors provide an organized look at the literature, with particular attention to important questions that remain open for further research. They focus research related to analysts' decision processes and the usefulness of their forecasts and stock recommendations. Some of the major surveys were published in the early 1990's and since then no less than 250 papers related to financial analysts have appeared in the nine major research journals that we used to launch our review of the literature. The research has evolved from descriptions of the statistical properties of analysts' forecasts to investigations of the incentives and decision processes that give rise to those properties. However, in spite of this broader focus, much of analysts' decision processes and the market's mechanism of drawing a useful consensus from the combination of individual analysts' decisions remain hidden in a black box. What do we know about the relevant valuation metrics and the mechanism by which analysts and investors translate forecasts into present equity values? What do we know about the heuristics relied upon by analysts and the market and the appropriateness of their use? Financial Analysts' Forecasts and Stock Recommendations examines these and other questions and concludes by highlighting area for future research.

Earnings Management

Earnings Management
Author: Joshua Ronen
Publisher: Springer Science & Business Media
Total Pages: 587
Release: 2008-08-06
Genre: Business & Economics
ISBN: 0387257713
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This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?

Earnings Management and Expectations Management

Earnings Management and Expectations Management
Author: Srinivasan Sankaraguruswamy
Publisher:
Total Pages: 41
Release: 2012
Genre:
ISBN:
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Prior literature has argued that managers manipulate earnings; other literature suggests that managers manipulate analysts (market) expectations of earnings. These two streams treat the two types of manipulation as occurring independently of each other. Our paper suggests that managers manipulate both earnings and expectations at the same time, and model them as jointly determined. In this model, errors in earnings and forecasts are positively correlated. In prior research the data reject the null that earnings forecasts are rational; in terms of this paper's model, these rejections are to be expected; given the positive correlation in errors between managers and analysts, prior tests are mis-specified. A non-zero forecast error on average is taken to mean that analysts are biased; this paper's model of joint determination predicates a non-zero forecast error on average. Similarly, this paper's model predicts rejection of rationality in other standard tests.