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Analyst forecasts, earnings management, and insider trading patterns

Posted on:2006-07-04Degree:Ph.DType:Dissertation
University:Case Western Reserve UniversityCandidate:Markarian, GarenFull Text:PDF
GTID:1456390005995593Subject:Business Administration
For at least two decades, it was believed that making managers into owners could ameliorate many agency conflicts existing in capital markets settings. In fact, it now appears that managerial ownership of stock itself may encourage earnings manipulations. In this paper, we hypothesize that investors' focus on reported earnings relative to a benchmark and management compensation related to equity based compensation create incentives to use earnings management to exceed consensus earnings forecasts. The hypotheses are empirically tested using a sample of around 1500 observations from 1992--1999. These tests specifically address the use of discretionary accruals to exceed forecasts, insider trading patterns relative to performance and relative to performance under earnings management, abnormal profits earned from insider trading, and firm performance subsequent to insider trading. The results show, consistent with prior research, that managers use discretionary accruals to exceed consensus earnings forecasts. Broadly, managerial insider selling increases with performance relative to consensus forecasts, and is magnified by stock option holdings. Insider selling is more intense among managers who have used discretionary accruals to exceed forecasts. Managers who sell following the announcement of an earnings surprise are able to earn abnormal profits. Firms having both positive earnings surprises and insider selling exhibit lower subsequent accounting performance. These results provide insights into the effects of equity compensation arrangements on broad managerial strategies related to using discretionary accruals in conjunction with insider trading contingent on firm performance.
Keywords/Search Tags:Insider trading, Earnings, Discretionary accruals, Forecasts, Performance, Managers
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