1. Corporate investment and earnings surprises.
- Author
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Markarian, Garen and Michenaud, Sebastien
- Subjects
INSTITUTIONAL investments ,CORPORATE profits ,EARNINGS management ,MANAGERIAL accounting ,BOOK-to-market ratio ,EMPLOYEE bonuses ,BENCHMARKING (Management) ,ETHICAL investments - Abstract
We find that firm-level investment is negatively related to the likelihood of meeting or beating analysts' short-term EPS forecasts. In a 35-year panel dataset of US based companies, we find evidence that suggests firms with the best growth opportunities, opaque firms, and firms with higher than usual bonus compensation, are the ones to alter investment in order to beat benchmarks. Utilizing the passage of Sarbanes-Oxley as a natural experiment we find that firms trade off accruals-based earnings management in lieu of investment cuts. Results are robust to a number of covariates, and endogeneity or reverse causality does not seem to drive our inferences. This study suggests that, consistent with survey results from Graham, Harvey, and Rajgopal [2005. "The Economic Implications of Corporate Financial Reporting." Journal of Accounting and Economics 40: 3โ73], managers may reduce or delay corporate investment to meet or beat short-term earnings benchmarks. [ABSTRACT FROM AUTHOR]
- Published
- 2019
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