The Effect of Earnings Quality on Analyst Forecast Accuracy, Dispersion, and Optimism and Implications for CEO Compensation

Extant research indicates that earnings attributes are important considerations to corporate decision makers and users of accounting information (e.g., Francis et al., 2004). One such attribute is earnings quality; often measured as the magnitude of accruals that do not convert to cash in a timely manner, where a poor match of cash flows and accruals indicates low earnings quality (e.g., Dechow and Dichev, 2002). Such accruals could be used to manage earnings, a practice that aims to achieve a pre-determined level of earnings by using accounting techniques rather than actual firm performance. This study consists of two essays and examines the effect of earnings quality on two groups of financial statement users; specifically financial analysts and CEO compensation setters. The first essay investigates the impact of earnings quality on earnings forecast accuracy, forecast dispersion, and forecast optimism of individual financial analysts. The primary model employed for analyst forecast accuracy is consistent with Barniv et al. (2005), Clement (1999), and Jacob et al. (1999). Further reduced model of forecast accuracy based on variables used by Bae et al. (2008) is also used. The forecast dispersion model is based on that of Behn (2008), and forecast optimism is measured following Cowen et al. (2006). The findings show that when earnings quality is higher, analyst forecasts exhibit greater accuracy and lower optimism. Higher earnings quality has some impact on forecast dispersion; however the affect largely disappears when correcting for correlation within firm clusters. The second essay examines whether earnings quality plays a role in CEO compensation when corporate earnings satisfy (or fail to satisfy) the market’s expectations. Specifically, Essay II examines CEO bonus as the measure of compensation used to reward the CEO for performance. Because such rewards are often accomplished with cash compensation, and because salary is usually set before the start of the year, the bonus portion of the CEO’s total pay package is likely to be affected by earnings quality (Matsunaga and Park (2001). The results provide evidence that lower earnings quality is associated with higher CEO bonus compensation for firms that have satisfied market earnings expectations.

Name thesis:degree_name

PHD

Level thesis:degree_level

doctoral

Discipline thesis:degree_discipline

College of Business and Entrepreneurship, Ambassador Crawford / Department of Accounting

Grantor dc:publisher

Kent State University

Year dc:date

2013

Author dc:creator

• Salerno, David F.

Contributors dc:contributor

• Barniv, Ran

• Accounting
• Financial analysts
• Forecast accuracy
• Forecast Dispersion
• Forecast optimism
• Earnings quality
• CEO compensation
• Meet or Beat

Statement dc:rights

• unrestricted
• This thesis or dissertation is protected by copyright: all rights reserved. It may not be copied or redistributed beyond the terms of applicable copyright laws.

Language dc:language

English

Repository record dc:identifier

http://rave.ohiolink.edu/etdc/view?acc_num=kent1364931171

OAI identifier oai:identifier

oai:etd.ohiolink.edu:kent1364931171