It’s Showtime: Do Managers Report Better News Before Annual Shareholder Meetings? by Valentin Dimitrov, Prem Jain :: SSRN

I hope no one is surprised by this: managers seemingly try to influence analysts and shareholders by providing good news just prior to the firm's annual meeting. That is the conclusion on a paper by Dimitrov and Jain that examines the 40 days prior to the firm's annual shareholder meeting.


It’s Showtime: Do Managers Report Better News Before Annual Shareholder Meetings? by Valentin Dimitrov, Prem Jain :: SSRN:

The pre-meeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average cumulative abnormal returns of 3.4% and buy-and-hold returns of 7.0% during the 40-day pre-meeting period. Companies with poor past performance exhibit even higher pre-meeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.

One caveat that I would like strengthened a bit: reversion to the mean.  If a firm is in worst performing decile, it may get better just by chance/bid ask bounce, etc.

Related articles

• Carl Icahn Issues Open Letter to Shareholders of Oshkosh Corporation (prnewswire.com)
• Why aren't shareholders revolting over excessive boardroom pay? (guardian.co.uk)
• Investing Red Flags: 3 Companies with High Corporate Governance Risk (wire.kapitall.com)

Does short-term debt lead to more "earnings management"?

In another paper from the FMAs, Gupta and Fields look at whether more short term debt leads to more "earnings management."

Does short-term debt lead to more "earnings management"?

Short answer: YES.

Longer answer:

Intuitively the idea behind the paper is that if a firm has to go back to the capital markets, they do not want to do so when times are bad. Of course, sometimes times are bad. In those times, management may be tempted to "manage" earnings so that things do not appear as bad as they may be.

The findings? Sure enough, managers seemingly manage their firm's earnings more when the firm has more short term debt.

A few look-ins:

From the Abstract (this is the best summary of the entire paper):

"...results indicate that (i) firms with more current debt are more susceptible to managing earnings, (ii) this relation is stronger for firms facing debt market constraints (those without investment grade debt) and (iii) auditor characteristics such as auditor quality and tenure help diminish this relation...."

Which fits intuition. Why?
* The more the constraints, the more incentive the management has to manage earnings since if they do not, they may not be able to refinance.
* Auditors would frown upon this behavior and the stronger the auditor, the less likely it is that the manager would manage earnings.

How does this "earnings management" manifest itself? The most common way (although not the only way) that managers manipulate earnings is through the use of accruals . Thus, the authors examine this and find:

"A one standard-deviation increase in short-term debt (total current liabilities) increases discretionary accruals by 1.69% and increase total accruals by 2.28%. Our evidence supports the idea that debt maturity significantly impacts the tendency of firms to manage earnings."

Which is a really interesting finding!

Dell, Admitting Managers Inflated Sales Reports, Will Restate Income - New York Times

Dell, Admitting Managers Inflated Sales Reports, Will Restate Income - New York Times:

"The senior management of Dell regularly falsified quarterly returns from 2003 through 2006 to create the appearance that the company had met sales targets, the computer maker disclosed Thursday. The accounting misconduct also resulted in inflated earnings, so the company will restate its net income for the period by $50 million to $150 million, it said. The disclosures came after a yearlong internal probe. The Securities and Exchange Commission is also investigating the company’s behavior."

While classes have not started yet here at SBU, I am sure this will be talked about in class.

Some suggested ways of bringing it into the classroom:

• Why might a manager want to do this?
• What can be done to prevent it? Lower the likelihood?
• Do incentive based pay plans (be it accounting-based or market-based) increase the likelihood of such behavior? Do the benefits of these plans outweigh the problems?
• How might an auditor find such problems?
• Are there red flags for an investor that would suggest earnings management?