An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Dan Givoly
The Pennsylvania State University

Carla Hayn
University of California Los Angeles

Timothy R Yoder
The Pennsylvania State University

Abstract: This paper examines whether analysts behave as if they attempt to predict the firm’s “correct” or “unmanaged” earnings or whether, instead, they forecast the earnings that management is most likely to report regardless of whether these earnings are incorrect (GAAP-wise) or correct, managed or unmanaged. The results, based on both a sample of 285 restatements and a much larger sample for which we identify cases of likely earnings management, are consistent with analysts focusing on the prediction of the earnings number most likely to be reported by management even if this number is incorrect or significantly managed. The results further indicate that as a group, analysts are incapable of identifying the “incorrect” or “managed” component of earnings. However, there is a considerable variability in forecasting behavior across analysts. For some firms analysts appear to be consistently better at forecasting the “correct” earnings than for other firms.

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