Detail práce

Is Revenue Management to Meet Earnings Benchmarks Informative?

Autor: Mgr. Jan Habětínek
Rok: 2020 - letní
Vedoucí: Jiří Novák M.Sc., Ph.D., Deloitte Corporate Chair
Typ práce: CSF - Corporate Strategy and Finance
Jazyk: Anglicky
Stránky: 84
Abstrakt: We propose and empirically test a new hypothesis that managers rationally choose between
specific channels of earnings management to meet earnings benchmarks. Prior research
documents that managers are ready to interfere with the neutrality of financial reporting
process to report earnings above zero, earnings above last year’s earnings, and earnings
above analysts’ forecast. However, there is a controversy over whether this earnings
management to meet or beat earnings benchmarks is intended to distort investors’ view by
delaying the disclosure of bad news or whether it is intended to communicate managers’
private information about the firm’s strong future performance. We argue that the
credibility of the earnings management signal crucially depends on the cost of its imitation.
As revenue management is more costly to imitate than cost management, we argue that
managers who intend to send a credible signal about their firm’s future performance likely
boost revenues rather than depress costs. To test this prediction, we use a recently developed
model of discretionary revenues that is arguably more powerful in detecting earnings
management than traditional techniques. The empirical results are consistent with our
predictions for the most important earnings benchmark – the consensus of analysts’
earnings forecasts – and they are weaker for the less prominent earnings benchmarks. We
provide some evidence on the use of revenue management to meet or beat last year’s
earnings, and no evidence on the use of revenue management around the zero earnings
threshold. Taken together, our results contribute to the information economics and financial
accounting literatures by documenting managers’ rational choice between earnings
management channels around the most important earnings benchmark, which implies that
inflated earnings in those settings communicate managers’ private information rather than
obfuscate the firm’s current performance.
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