Incentive to Manipulate Earnings and its Connection to Analysts’ Forecasts, Trading, and Corporate Governance

Posted: 22 Nov 2015

See all articles by Marcelo Pinheiro

Marcelo Pinheiro

PCAOB

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

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

Pinheiro, Marcelo and Igan, Deniz, Incentive to Manipulate Earnings and its Connection to Analysts’ Forecasts, Trading, and Corporate Governance (April 21, 2010). Journal of Economics and Finance, Vol. 36, 2012, Available at SSRN: https://ssrn.com/abstract=2693812

Marcelo Pinheiro (Contact Author)

PCAOB ( email )

1666 K St NW
800
Washington, DC DC 20006
United States

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
406
PlumX Metrics