Do analysts remove earnings management when forecasting earnings?
Porter, Jason C.
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Recent evidence suggests that analysts anticipate the effects of earnings management when creating their earnings forecasts. However, these studies offer conflicting stories about how analysts use this information. Burgstahler and Eames (2003) suggest that analysts incorporate earnings management into their forecasts to improve their accuracy, while Abarbanell and Lehavy (2003) suggest that analysts remove earnings management to provide useful information to investors.This paper investigates which view is more consistent with the data. I find evidence consistent with analysts including the effects of earnings management in their forecasts. Additional tests suggest that the asymmetries in the forecast error distribution documented by Abarbanell and Lehavy (2003) are due to managers’ ‘last minute’ earnings manipulations instead of analysts’ attempts to remove the effects of earnings management.