Effects of Managerial Discretion in Fair Value Accounting Regulation and Motivational Incentives to “Go Along” with Management on Analysts' Expectations and Judgments

Abstract

The current study examines the extent to which financial analysts expect firms to manage earnings when accounting rules allow a relatively high degree of discretionary choice and low level of transparency, and measures whether analysts' stock price estimates are upwardly biased when they are aware that management is taking advantage of the situation. We further investigate whether analysts' expectations and judgments in this regard are amplified in the presence of an incentive to "go along" with management's misleading financial information.A total of 44 experienced financial analysts participate in a between-participants experiment, wherein those who are provided with misleading (non-misleading) information from management regarding the fair value of an impaired asset for which there is no active exchange market, expect management to recognize a downwardly biased (non-biased) asset impairment loss and issue commensurately higher (lower) stock price estimates. The results also show that analysts who have an incentive to go along with management anticipate a downwardly biased impairment loss and provide a higher stock price estimate, relative to analysts with no such incentive. Finally, the research findings indicate a significant interaction whereby the differential responses from analysts in the truthful and misleading conditions are greater in the presence, compared to absence, of an incentive go along with management.

Modernizing governments in Transitional and Emerging Economies through financial reporting based on international standards

“…In contrast, based on McEwen et al (2008), Rowe and Day (2008), Ronen (2008) and Rodrı´guez and Navarro (2007), the main drawbacks of FVA are: (1) not all public sector assets can be negotiated in active and liquid markets, which could raise problems of reliability of financial information due to the possibility of manipulating this information; (2) some public sector assets have been acquired or built for the specific function that they meet in the public sector to which they belong; (3) the difficulty in ascertaining the objectivity and verifiability of the fair value estimations; (4) the high cost of the estimation of fair value measures; (5) the fair value estimations need to take into account the particular circumstances both of the public sector entity and of the nature of the public sector asset which could raise problems about the timeliness of financial information; (6) the fair value measures are not always appropriated because they put emphasis on the financial aspect and not on the economic aspect.…”

The effects of analyst forecasts and earnings trends on perceptions of management forecast credibility

“…Recent research suggests that the relationship between management and analysts provides incentives for analysts to issue biased forecasts (Libby et al. , 2008; McEwen et al. , 2008).…”

Behavioral mediators of financial decision making – a state-of-art literature review

“…The results are consistent with the position that investors’ judgments of risk and return, both mediated by sentiment, influence market prices. Studies identify many behavioral variables affecting investor judgment as investment-related knowledge and experience (Victoravich, 2010), financial professionals’ overconfidence (Peterson et al , 2015; Gloede and Menkhoff, 2014), decision goal (Young, 2009), social influence (Andersson et al , 2014), analyst overoptimism (Jones and Johnstone, 2012), multiple information sources and subjective confidence (Du and McEnroe, 2011), affect (Sevdalis et al , 2009), information spillovers (Hovakimian and Saenyasiri, 2014), unconditional size effect (Antoniou et al , 2014), expected information quality (Kwag, 2014), analyst’s evaluation of extent to disclosure reliability (McEwen et al , 2008) and information on which analysts base their forecasts – trend, variability and recency (Ashton and Cianci, 2007).…”