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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title The earnings game with behavioral investors
Organization Unit
  • Kremena Bachmann
  • Thorsten Hens
  • English
Institution University of Zurich
Series Name NCCR FINRISK Working Paper
Number 406
Date 2007
Abstract Text This paper studies how the investors' attitude towards earnings surprises affects the managers' incentives to manipulate earnings in an intertemporal context, where the consensus forecast of the analysts is not exogenously given but determined by the strategic interaction between the analysts and the managers. Our analysis shows that given the asymmetric investors' reaction to earnings surprises, managers have strong incentives to manipulate earnings. In dependence on their time preferences, managers may choose to manipulate the earnings in order to match the consensus forecasts. In this equilibrium, rational investors are systematically fooled. Assuming that managers' preferences are equally distributed in the economy, we also derive conclusions on how the absolute level of manipulation in the economy changes with the investors' preferences, the managers' compensation package and the earnings guidance they may provide to analysts.
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