Do Publicly Signalled Earnings Management Incentives Affect Analyst Forecast Accuracy?

Abstract

Using a panel of listed Australian firms for the years 1999-2007, this paper investigates whether analysts' forecast efficiency is improved by the occurrence of a publicly observable event, such as a CEO appointment, which signals a firm's earnings management incentives. Two supporting hypotheses are also tested: first, that CEO appointments are associated with income-decreasing earnings management; and second, that analyst forecast errors increase with the level of earnings management present in current period financial statements. Consistent with prior literature, we find income-decreasing earnings management in the year of CEO appointment. Earnings management, as a general phenomenon, is found to be significantly related to analyst forecast errors in the period in which the earnings management occurs. However, we present evidence that analyst forecasts for current year earnings are significantly more accurate with respect to earnings management in cases where a CEO is appointed during the current financial period. Show more