On the Use of Accounting vs. Real Earnings Management to Meet Earnings Expectations - A Market Analysis

Abstract

In this study we examine the extent to which accounting earnings management (AEM) and real earnings management (REM) differ in their impact on future operating performance and how the market rewards firms for meeting or beating analysts’ forecasts. We find that firms using REM exclusively to meet analysts' expectations outperform firms using AEM in the longer term and perform no worse than firms that meet without earnings management. We also find that the equity premium to meeting or beating analysts’ forecasts is significantly higher for firms that use REM to achieve this earnings target than for firms that use AEM. However, we find no difference in the premium for firms that use REM relative to firms that do not engage in earnings management. These findings suggest that REM possesses positive signaling effects about future firm performance.