How does earnings management influence investor's perceptions of firm value? Survey evidence from financial analysts

Abe de Jong, Gerard Mertens, Marieke van der Poel, Ronald van Dijk

Research output: Contribution to journalArticleResearchpeer-review

25 Citations (Scopus)

Abstract

Survey evidence shows CFOs to believe that earnings management can enhance investor valuation of their firms. This evidence raises the question of correspondence between the beliefs of CFOs and investors. Surveying financial analysts to gain insight into how earnings management influences investor perception of firm value, we find analysts' and CFOs' beliefs to be generally consistent. We find that analysts perceive meeting earnings benchmarks and smoothing earnings to enhance investor perception of firm value and all earnings management actions to reach a benchmark, save share repurchases, to be value destroying. CFOs, however, are reluctant to repurchase shares, preferring to use techniques viewed by analysts as value destroying (e.g., reductions in discretionary spending). Analysts' inability to unravel such techniques perhaps explains CFOs' preferences.

Original languageEnglish
Pages (from-to)606-627
Number of pages22
JournalReview of Accounting Studies
Volume19
Issue number2
DOIs
Publication statusPublished - 2014
Externally publishedYes

Keywords

  • Earnings benchmark
  • Earnings management
  • Earnings smoothing
  • Financial analysts
  • Financial executives
  • Financial reporting

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