Melbourne Accounting Research Seminar - Professor Oded Rozenbaum

Assistant Professor Oded Rozenbaum from the George Washington University will present a MARS seminar.

Topic: Analysts' Suspicions of Real Earnings Management and Conference Call Narratives

Abstract: The Q&A section of earnings conference calls allows analysts to ask questions and resolve uncertainties. We examine whether analysts question managers on discretionary expenses when they suspect that discretionary expenses were opportunistically lowered to meet or narrowly beat analysts’ expectations. We use three alternative measures for abnormal discretionary expenses and observe more questions on discretionary expenses when abnormal discretionary expenses are lower only for firms that meet or narrowly beat analysts’ expectations. We then examine the  consequences of analysts’ suspicions of discretionary expense manipulations. We find that questions on discretionary expenses are associated with lower market reaction and analysts’ revisions only for firms that meet or narrowly beat analysts’ expectations. Our findings suggest that analysts examine whether firms engage in real earnings management to meet or narrowly beat expectations, inquire about it at conference calls, and update their expectations accordingly.