Market Reaction to Earnings Management : The Incremental Contribution of Analysts

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We investigate whether analysts have an incremental contribution, beyond financial statement information, to investors' ability to detect and react to earnings management. Using both return and price analyses in a short-window design, we show that investors”fixate”on reported earnings and seem unable to disentangle earnings management information, at least during the ten days following the publication of financial statements. Markedly, thirty days after the date of disclosure, with additional timely information released by analysts (as captured by analyst recommendations and target prices), investors appear to reassess the quality of managed earnings. We show that analysts react negatively to firms that artificially inflate earnings and that this negative reaction is followed by an even stronger negative reaction by the market. The results are supported by a set of sensitivity tests that consider the robustness of our findings to the measure and extent of earnings management.
Original languageEnglish GB
Pages (from-to)196-214
JournalInternational Research Journal of Finance and Economics
StatePublished - 2007


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