Accrual Based Earnings Management, Real Transactions Manipulation and Expectations Management: U.S. and International Evidence

Managers face a number of incentives to report earnings that meet or exceed the consensus analyst forecast. If a firm’s results of operations are not sufficient to meet the analysts’ expectations for a given period, the manager may 1) use accrual based earnings management techniques or 2) structure actual transactions to achieve the desired financial reporting result. Additionally, the manager may attempt to guide the analyst’s forecast down to a “beatable level,” a phenomenon referred to as “expectations management.” This paper provides an overview of these three mechanisms and describes the interrelationships among them. Recent changes in the regulatory environment in the United States (e.g., Regulation Fair Disclosure and the Sarbanes Oxley Act) have changed managers’ use of these tools. This paper discusses these changes as well. Evidence of the existence of these practices in both the United States and in various countries throughout the world is discussed.