ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of Management Earnings Forecasts on Earnings Management

  • Kim, Bo-Min Ph.D. in Business Administration, Soongsil University
  • Lee, Sang-Ryul Bucheon University
  • Oungrak Oh Soongsil University

Asian Tax Journal Vol. 12 No. 4 (2011), pp. 143-171

Abstract

This study examines the effect of management earnings forecasts on earnings management. The sample consists of manufacturing firms listed on Korean Stock Exchange which issue management earnings forecasts between 2002 and 2009. This study tests whether firms issuing forecasts differ from non－forecasters in the level of earnings management and then investigates whether forecasting firm's level of earnings management is conditioned by earnings－forecast deviation. This study examines earings management behavior, focusing on both earings management through discretionary accruals and real activities manipulation. To capture earings management we use extended cross－sectional Jones model(Larcker et al. 2007) of discretionary accruals, and Roychowdhury(2006), Cohen & Zarowin(2008) model of real activities manipulation. The main results of this study are as follows；First, forecasting firm's level of earnings management is higher than that of non－forecasting firms. This shows that forecasters engage in earnings management more willingly to meet the earnings forecasts than non－forecasters do. Second, this study finds that forecasting firm's earings management behavior is affected by earnings－forecast deviation. If its actual earnings are lower than expected and it is likely to achieve earnings forecasts with small earnings－forecast deviation then the more it manages earings to meet forecasts. All of these results come to the same conclusion in both earings management through discretionary accrual and real activities manipulation. The contributions to the literature are as follows；First, the result of this study will help improve disclosure systems about management earnings forecasts in the future. Second, this study tries to reflect the annual change of business and economic environments by analyzing forecasters and non－forecasters cross－sectionally. This study also has some limitations. First, there is possibility of measurement errors in computing the level of earnings management through discretionary accruals and real activities manipulation. Second, there still exists a chance that all characteristics of forecasters aren't controlled in this study.

Keywords

  • discretionary accruals
  • real activities manipulation
  • management earnings forecasters
  • over －performed forecasters

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