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The earnings game with behavioral investors


Bachmann, Kremena; Hens, Thorsten (2007). The earnings game with behavioral investors. NCCR FINRISK Working Paper 406, University of Zurich.

Abstract

This paper studies how the investors' attitude towards earnings surprises a®ects the managers' incentives to manipulate earnings in an intertemporal context, where the consensus forecast of the analysts is not exogenously given but determined by the strategic interaction between the analysts and the managers. Our analysis shows that given the asymmetric investors' reaction to earnings surprises, managers have strong incentives to manipulate earnings. In dependence on their time preferences, managers may choose to manipulate the earnings in order to match the consensus forecasts. In this equilibrium, rational investors are systematically fooled. Assuming that managers' preferences are equally distributed in the economy, we also derive conclusions on how the absolute level of manipulation in the economy changes with the investors' preferences, the managers' compensation package and the earnings guidance they may provide to analysts.

Abstract

This paper studies how the investors' attitude towards earnings surprises a®ects the managers' incentives to manipulate earnings in an intertemporal context, where the consensus forecast of the analysts is not exogenously given but determined by the strategic interaction between the analysts and the managers. Our analysis shows that given the asymmetric investors' reaction to earnings surprises, managers have strong incentives to manipulate earnings. In dependence on their time preferences, managers may choose to manipulate the earnings in order to match the consensus forecasts. In this equilibrium, rational investors are systematically fooled. Assuming that managers' preferences are equally distributed in the economy, we also derive conclusions on how the absolute level of manipulation in the economy changes with the investors' preferences, the managers' compensation package and the earnings guidance they may provide to analysts.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2007
Deposited On:05 May 2014 15:19
Last Modified:08 Dec 2017 05:14
Series Name:NCCR FINRISK Working Paper
Free access at:Related URL. An embargo period may apply.
Official URL:http://www.zora.uzh.ch/95106/
Related URLs:http://www.nccr-finrisk.uzh.ch/wps.php?action=query&id=406
http://www.nccr-finrisk.uzh.ch/media/pdf/wp/WP406_A1.pdf
Other Identification Number:merlin-id:4564

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