Real Earnings Management, Habitually Meeting/Closely Beating Analysts’ Forecasts and Firm Valuation

Abstract

This paper values firms that utilize real earnings management (REM) to habitually meet/closely beat analysts’ earnings forecasts (HabitMBE). The results suggest that in equilibrium, while HabitMBE firms in general enjoy a market premium, HabitMBE firms that use REM repeatedly are penalized by investors, and the market premium disappears. Not surprisingly, I find that HabitMBE firms that have already used REM repeatedly try to curtail its use. Another interesting finding is that analysts’ downward forecast revision has a significantly negative effect on firms’ valuation, which prior studies have not clearly documented.