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This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?

Advances in Quantitative Analysis of Finance and Accounting (New Series) is an annual publication designed to disseminate developments in the quantitative analysis of finance and accounting. The publication is a forum for statistical and quantitative analyses of issues in finance and accounting as well as applications of quantitative methods to problems in financial management, financial accounting, and business management. The objective is to promote interaction between academic research in finance and accounting and applied research in the financial community and the accounting profession. The papers in this volume cover a wide range of topics including corporate finance and debt management, earnings management, equity market, auditing, option pricing theory, and interest rate theory. In this volume there are eleven chapters, five of them are corporate finance and debt management: 1. Liquidity and Adverse Selection: Evidence from the Five-or-Fewer Rule Change; 2. Changing Business Environment and the Value of Relevance of Accounting Information; 3. Pricing Risky Securities in Hidden Markov-Modulated Poisson Processes; 4. An Empirical Assessment of Alternative Dividend Expectation Models; 5. Quantitative Market Risk Disclosure, Bond Default Risk and The Cost of Debt: Why Value At Risk? There are two of the other six chapters which cover interest rate theory: 1. Positive Interest Rates and Yields: Additional Serious Considerations; 2. Collapse of Dimensionality in the Interest Rate Term Structure. The remaining four chapters cover financial analysts earnings forecasts, equity market, auditing, and option pricing theory. These four papers are: 1. Investors’ Apparent Under-weighting of Financial Analysts’ Earnings Forecasts: The Role of Share Price Scaling and Omitted Risk Factors; 2. Predicting Stock Price by Applying the Residual Income Model and Bayesian Statistics; 3. Intertemporal Associations Between Non-Audit Services and Auditors’ Tendency to Allow Discretionary Accruals; 4. Put Option Portfolio Insurance vs. Asset Allocation.

This paper examines the hypothesis that when disappointing information regarding a firm's performance is released, the firm's management faces particularly strong incentives to counter the disappointing news with overly optimistic forward-looking statements. To address this issue, the paper investigates the properties of management earnings forecasts released simultaneously with earnings announcements. The paper predicts and finds that the more disappointing the earnings announcement news, the higher the optimistic bias in the simultaneously released management long-horizon forecasts of annual earnings. Since managers may use short-horizon forecasts of quarterly earnings to avoid disappointing earnings announcements, the paper also examines the interplay between management short-horizon forecasts of quarterly earnings and long-horizon forecasts of annual earnings that are released simultaneously. The paper documents a significantly negative association between the news contained in the short-horizon forecasts of quarterly earnings and the optimistic bias in the accompanying long-horizon forecast of annual earnings. The paper also investigates the link between management's decision to issue earnings guidance and the contemporaneous earnings announcement news, finding that, in general, more extreme earnings announcement news results in more earnings guidance. Finally, using market reaction tests, the paper documents that market participants are aware, at least to some extent, of management's tendency to counter disappointing earnings news with overly optimistic forecasts.