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Earnings management and its impact on the information content of earnings and the properties of analysts forecasts

University of British Columbia

Accounting information is an integral part of the information set used by investors. However, accrual based accounting earnings are susceptible to earnings management. Investors are concerned about earnings management since earnings management can distort reported earnings and they may make decisions that they otherwise would not have made. The purpose of this thesis is to examine the impact of earnings management on the informativeness of reported earnings about firm value and analysts' forecasts. Chapter 2 develops an earnings management model and examines the impact of earnings management on income smoothing and the earnings response coefficient. Chapter 3 critically reviews the existing discretionary accrual models and discusses the measurements of earnings management and income smoothing, which are used in the subsequent empirical chapters. Chapter 4 empirically examines the impact of earnings management on the earnings response coefficient after controlling either for the smoothness of pre-managed earnings or for the smoothness of reported earnings. Firms are further decomposed into income smoothing and variance-increasing earnings management firms and the same analyses are repeated. Chapter 5 examines the impact of smoothness of reported earnings and earnings management on the equilibrium demand for analysts' services and the properties of analysts' forecasts. This thesis contributes to our understanding of the impact of earnings management on firm value and analysts' forecasts by providing empirical evidence consistent with the hypothesis that the financial market and analysts are aware of the nature of a firm's discretionary accrual policy, and use their beliefs about the firm's discretionary accrual policy in assessing firm value and deciding whether to follow the firm.

Thesis/Dissertation

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2009-07-02

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http://hdl.handle.net/2429/9902

Business Administration

University of British Columbia

UBCV

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