Analysts’ Suspicions of Earnings Management and Conference Call Narratives

Date
2018-08-31
Authors
Ji, Yuan
Rozenbaum, Oded
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Abstract
The Q&A section of earnings conference calls allows participants to ask questions and resolve uncertainties. We examine whether conference call participants question managers when they obtain signals that discretionary expenses contributed to firms meeting or narrowly beating analysts’ expectations. We observe more questions on discretionary expenses when abnormal discretionary expenses are lower only for firms that meet or narrowly beat analysts’ expectations. We also find that there are more questions on discretionary expenses when discretionary expenses are lower compared to both the prior and subsequent year, again, only for firms that meet or narrowly beat analysts’ expectations. We then examine the consequences of analysts’ suspicions of real earnings management. We find that questions on discretionary expenses are associated with lower market reaction and analysts’ revisions for firms that meet or narrowly beat analysts’ expectations. These results are stronger when firms’ cost of engaging in real earnings management and abnormal discretionary expenses are lower. Our findings suggest that analysts identify signals of real earnings management, inquire about them at conference calls, and update their expectations accordingly.
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Keywords
Earnings management, Conference calls, Discretionary expenses
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