An international comparison of incentives for earnings management in order to meet analysts forecasts

Abstract

Previous investigations have shown that when earnings meet analysts forecasts, the market reacts positively, and when these forecasts are not reached, the market reacts negatively. For this reason, forecasts become goals to beat, and as the literature has revealed, this creates an incentive for earnings management. The present paper extends prior research, providing evidence that the magnitude of the reward (penalty) for companies meeting (failing to meet) earnings forecasts differs depending on the market. In addition, it reveals that the strength of the incentive for companies to manage their earnings differs depending on the market in which they are listed. We compare six stock markets and find that the most powerful incentives arise when the reward for meeting the forecasts or the penalty for not doing so is greater.