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The purpose of this paper is to examine the association between audit committee characteristics and a firm’s ability to guide analysts’ forecasts downward to meet or beat earnings benchmarks.

The authors expect that a more effective audit committee would be able to reduce managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. Four committee characteristics are used to measure its effectiveness: independence, diligence, expertise and size.

For the pre-SOX (Sarbanes-Oxley Act) period (1996-2002), none of the four audit committee characteristics are significantly associated with managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. For the post-SOX era (2003-2004), however, the likelihood of engaging in downward forecast guidance is significantly lower for firms with larger and more independent audit committees. In addition, the likelihood is significantly lower for audit committees that are more diligent and have a higher proportion of the committee members with accounting or finance-related expertise.

Overall, the authors results suggest that, in response to the increased regulatory and listing requirements in the post-SOX era, audit committees have played a more active role in scrutinizing earnings guidance. Our results also suggest that a more effective audit committee in the post-SOX era curbs managers’ tendency to use downward forecast guidance to meet or beat quarterly earnings targets.

To the authors knowledge, this study is one of the first to examine the role of the audit committee in reviewing managerial earnings guidance. As earnings guidance plays an important role in the overall financial reporting process over time and given the increasing importance of downward forecast guidance in earnings surprise games in recent years, the authors believe this study addresses an important question and adds to prior literature. Also, this study contributes to their understanding of the changing nature and scope of audit committee oversight activities since the passage of SOX.

The purpose of this paper is to examine the relation between audit tenure and how clients manage the annual earnings surprise.

A sample of 5,029 firm‐year observations from 1996 to 2003 were employed to examine whether audit tenure is negatively related to the incidence of accrual‐based‐upward earnings management to avoid negative earnings surprises; and whether audit tenure is positively related to the incidence of downward forecast guidance to avoid negative earnings surprises.

Empirical results indicate a substitution of downward forecast guidance for upward earnings management as audit tenure lengthens.

The paper provides evidence that, as the auditor‐client relationship lengthens over time, firms turn to downward forecast guidance as a substitute for upward earnings management. One possible limitation of the sample period involves the implementation of the Sarbanes‐Oxley Act (SOX) of 2002. Because of the increased financial reporting scrutiny on both management and auditors that accompanies SOX, it is likely that constraints on earnings misstatements increase after SOX. Any decrease in upward earnings management resulting from SOX would thus work against finding a relation between audit tenure and the substitution of downward forecast guidance to prevent negative earnings surprises.

This paper supports the notion that audit tenure affects firms' choices among various tactics in their attempts to avoid negative earnings surprises. The results also contribute to the ongoing debate on mandatory audit firm rotation by showing that audit quality increases with audit tenure.

Barton and Simko argue that the balance sheet information would serve as a constraint on accrual‐based earnings management. This paper aims to extend their argument by examining whether the balance sheet constraint increases managers' propensity to use either downward forecast guidance or real earnings management as a substitute mechanism to avoid earnings surprises.

Following Barton and Simko, the paper uses the beginning balance of net operating assets relative to sales as a proxy for the balance sheet constraint. The argument is that because of the articulation between the income statement and the balance sheet, previous accounting choices that increase earnings will also increase net assets and therefore the level of net assets reflects the extent of previous accrual management. Models from Matsumoto and Bartov et al. are used to measure forecast guidance. Following Rochowdhury and Cohen et al., a firm's abnormal level of production costs and discretionary expenditures are used as proxies of real earnings management. The empirical analysis is conducted based on the 1996‐2006 annual data for a sample of nonfinancial, nonregulated firms.

The paper finds that firms with higher level of beginning net operating assets relative to sales are more likely to guide analysts' earnings forecasts downward, and more likely to engage in real earnings management in terms of abnormal increases in production costs and abnormal reductions in discretionary expenditures.

Overall, the paper's 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.

This study adds to prior literature that examines how managers trade off different mechanisms used to meet or beat analysts' earnings expectations. It also contributes to the extant literature by providing further insights on the role of balance sheet information in the process of managing earnings and/or earnings surprises.

Financial analysts act as crucial conduits of information between firms and stakeholders. However, comparatively little is known about how these information intermediaries evaluate the believability and importance of corporate disclosures. We argue that a firm’s level of managerial discretion, or latitude of executive action, acts as a cue for financial analysts, which helps them interpret and respond to voluntary management earnings forecasts. Our study provides strong, robust evidence that financial analysts find management forecasts significantly less believable in low-discretion than in high-discretion environments, and therefore tend to be much less responsive to these forecasts. We also show that managerial discretion is especially impactful on analysts’ responses in those circumstances where analysts are typically most uncertain about how to interpret management forecasts.

This study aims to examine whether Chinese firms increase their concerns about analysts’ earnings forecasts following the split-share structure reform (SSR) in 2005, which removed trading restrictions on approximately 70% of the shares of listed firms.

Using data from 2002 to 2019, the authors empirically test the association between meeting or beating analysts’ earnings expectations and the implementation of SSR.

The authors find that firms are more inclined to meet analysts’ earnings expectations after the introduction of SSR. Further analysis shows that firms guide analysts to walk their forecasts down by manipulating third-quarter earnings, suggesting enhanced value relevance between analysts’ forecasts and third-quarter earnings management in the postreform period.

The findings reveal an undesirable side effect of SSR and suggest that policymakers and regulators should consider and carefully manage the complex relationships between firms and analysts.

In contrast to prior studies that predominantly focus on the positive effects of the reform, this study reveals the side effects of SSR and provides new evidence on the mechanisms of meeting or beating analysts’ earnings expectations.

Researchers have long been interested in understanding why and how corporate managers issue earnings guidance and the effect of such guidance on stakeholders’ (investors’ and managers’) behavior. Several recent studies have employed the experimental approach to address these issues. The purpose of this paper is to analyze and synthesize the literature on experimental studies of management earnings guidance. Consistent with the literature, I organize the synthesis to reflect (a) whether, why and how management issues guidance; (b) investors’ reactions to guidance; (c) the effect of guidance on management behavior. In addition, I provide institutional information (e.g., nature and timing of guidance) about guidance as well as provide several directions for future research. The synthesis reveals that the experimental studies have made a unique contribution to this literature by (i) providing evidence on process variables that underlie some empirical associations, (ii) directly measuring managers’ personal attributes and, (iii) closing the causality gap in the guidance literature.

By deferring profits and anticipating losses, conservatism makes earnings increases more persistent and earnings declines more likely to revert. Therefore, the level of conservatism in current earnings has implications for future earnings expectations. Past research shows that outsiders can fail to understand these implications. This paper aims to investigate whether firms help outsiders by voluntarily disclosing their expectations about how conservatism will affect future earnings trends.

The authors examine the likelihood and content of “early” earnings guidance – i.e. guidance about future earnings that is released around or before the announcement of current earnings. The sample is made of 8,820 annual earnings announcements, 62 per cent of which are combined with early guidance.

The authors find that the more conservative current earnings, the higher: the likelihood that the firm releases early guidance; the likelihood that the firm predicts a positive change in earnings; and the difference between the forecasted earnings and current earnings. The authors also find such guidance to be relevant to analysts, who use it to update their forecasts.

By showing that firms use early guidance to disclose the effect of conservatism on future earnings, the study is interesting to users and preparers because it shows that analysts need and use such disclosure; and regulators because it alleviates concerns about the information consequences of conservatism.

The findings show that firms do not refrain from committing to positive early guidance to disclose the earnings effects of conservatism. This is interesting in light of the difficulty of predicting such effects, the manager incentives to keep expectations low and the cost of committing to positive guidance instead of less risky qualitative disclosure alternatives. In this way, the authors contribute to the literature on the interrelation between voluntary disclosure and conservatism in financial reports.

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Index by subjects, compiled by K.G.B. Bakewell covering the following journals: Facilities Volumes 8‐17; Journal of Property Investment & Finance Volumes 8‐17; Property Management Volumes 8‐17; Structural Survey Volumes 8‐17.