How Do Managers Delay the Revelation of Bad News? Evidence from a Coordinated Strategy using Accrual Choices and Management Forecasts

Abstract

We provide evidence that some managers delay the revelation of bad news using a coordinated strategy involving both reported accruals and earnings forecasts. Specifically, we observe a correlated bias in contemporaneous accruals and management forecasts when both indicate higher, but not lower, future performance. Furthermore, this bias occurs in periods preceded by poor economic performance, where incentives to delay revealing the full extent of the bad news are greater. The joint use of inflated accruals and optimistic management forecasts is associated with optimism in analysts’ subsequent forecasts and with a decline in stock prices over the following year, suggesting that managers successfully delay the revelation of bad news using this strategy. Finally, evidence from financial statement misstatements (identified through subsequent restatements) is consistent with sample firm managers jointly issuing optimistic guidance and manipulating accruals using means outside of Generally Accepted Accounting Principles.