Bloated Balance Sheet and Substitute Mechanisms to Avoid Negative Earnings Surprises
Subject Areas : Management AccountingHassan Farajzadeh Dehkordi 1 , Hassan Hemmati 2 , Hale Sanaee 3
1 - استادیار گروه حسابداری موسسه آموزش عالی رجاء
2 - استادیار گروه حسابداری موسسه آموزش عالی رجاء
3 - کارشناس ارشد حسابداری، موسسه آموزش عالی رجاء
Keywords: Discretionary Accruals, Downward Forecast Guidance, Negative Earnings Surprises, Real Earnings Management,
Abstract :
In this paper, we examine the role of the balance sheet as a constraint on accrual-basedearnings management and its impact on the tradeoffs between accrual-based earningsmanagement, real earnings management, and forecast guidance in managing earningssurprises. Overall, our evidence suggests that managers turn to real earnings management or downward forecast guidance as a substitute mechanism to avoid negative earnings surprises when their ability to manipulate accruals upward is constrained by the extent to which net assets are already overstated in the balance sheet. Nevertheless, our evidence should be interpreted with caution given the limitations of our study. In particular, our study uses management’ earnings forecasts rather than analysts’ earnings forecasts.
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