• Do the Market Analysts’ Earnings Forecast Errors Matter with Earnings Management in the U.S. Banking Industry?

Abstract

Previous studies support that earnings management does exist in the U.S. banking industry. Is this earnings manipulation driven by achieving zero or small positive earnings surprise? A number of past studies show that firms tend to manage earnings upward when they observe they are unable to meet analyst’s forecast. To verify meeting analyst’s forecast for upward earnings management, there is a need to further address the issue that firms should tend to beat the analyst’s forecast after earnings are managed upward. Past related studies did not distinct the ex ante and ex post earnings deviate from the market earnings forecast, and also mainly focused on non-financial industries. In this study, we examine whether meeting market forecasts drive the banking industry engaged in upward earnings management. Thus, this research tries to provide answer for it empirically by employing logit model to investigate the relationship between bank’s earnings management and market analyst’s earnings forecast in the U.S. commercial banks during period 2001 and 2004. In consistent with previous research, we present that bank also tends to manage earnings upward when they ex ante observe greater deviation from the market forecasts. However, our results further show that banks are unlikely to beat the market expectations after managing earnings upward. Thus, we conclude that there is not enough evidences to show the earnings management in the U.S. banking industry driven by meeting market expectations. Finally, our results imply that the income-smoothing might provide alternative motivation for earnings management of banks.

Keywords: Earnings Management Direction, Ex ante Earnings Forecast Errors, Ex post Earnings Forecast Errors, Meeting the Market Expectation