Incentive to Manipulate Earnings and its Connection to Analysts’ Forecasts, Trading, and Corporate Governance
Posted: 22 Nov 2015
Date Written: April 21, 2010
Abstract
We develop a model where insiders’ decision to manipulate earnings is linked both to their stake and to corporate governance. We show how earnings manipulation affects analysts’ forecasts and institutional trading. More precisely, whenever there is “excessive” earnings manipulation, we observe less optimistic analysts. Furthermore, institutions exhibit positive feedback trading behavior and appear to “front-run” analysts’ errors. Finally, companies with strong corporate governance are less prone to these phenomena, being able to avoid the detrimental effects of insiders’ incentives. We then provide strong empirical evidence to support our model.
Keywords: Analysts’ Forecasts, Earnings Manipulation, Ownership
JEL Classification: G11, G12, G14, G34
Suggested Citation: Suggested Citation