CEO Centrality and Meeting or Beating Analysts' Earnings Forecasts

Abstract

Using a sample of S&P 500 firms over the period 2000-2005, we examine whether CEO centrality - the relative power of the CEO within the top executive team - is associated with a higher probability of meeting or barely beating financial analysts' earnings forecasts. We argue that CEOs with relatively high centrality are able to manipulate earnings in order to meet or just beat analysts' forecasts. Specifically, our results show that there is a positive association between CEO centrality and the likelihood of meeting or just barely beating analysts' forecasts. This finding holds after controlling for previously identified determinants proxying for managerial incentives, and earnings-related and forecast-related attributes. Additional tests show that CEO centrality is related to managing reported earnings upwards so that earnings targets can be met. Interestingly, our results show that as an explanatory variable, CEO centrality outperforms other proxies for CEO power used in prior studies. Collectively, our results suggest that a concentration of power in the top management team with the CEO can result in undesirable financial reporting behavior. © 2011 Blackwell Publishing Ltd.