comments on this paper. The capable computer assistance provided by Ashok Natarajan is appreciated.

We document that firms ’ management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increase during the period prior to SOX, followed by a significant decline after passage of SOX. However, the increase in earnings management preceding SOX was primarily in poorly performing industries. We also show that the informativeness of earnings increased steadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was one of the determinants of earnings management in the period preceding SOX. A previous version of this paper was titled “The Effect of the Sarbanes Oxley Act on Earnings

: This study examines whether it is cost beneficial for managers to guide analysts' forecasts downward and subsequently meet or beat expectations. We provide evidence on the cost benefit trade-offs by examining the weights placed by market participants on forecast revisions and forecast errors in determining share prices. We find that the cost of lowering expectations, i.e., market reaction to negative forecast revision, is lower than the benefits from reporting a positive earnings surprise. Thus, we find that beating expectations by lowering expectations is cost beneficial. However, in recent years the net benefits to such a strategy are no longer significant. We also find that capital market participants do not reward all firms that meet expectations. In fact, firms that guide analyst forecast downward and subsequently meet expectations experience negative abnormal returns. The Valuation Consequences of Meeting and Beating Expectations: Implications of Management Guidance. 1. Intro...

We gratefully acknowledge Thomson Financial I/B/E/S for providing earnings per share forecast data, which is part of its broad academic program to encourage earnings expectations research. THE IMPACT OF GOVERNANCE MECHANISMS ON INSIDERS ’ GUIDANCE OF ANALYSTS AND MANAGEMENT OF EARNINGS SURPRISES We investigate the relation between governance mechanisms and insiders ’ guidance of analysts and management of earnings surprises. Corporate insiders have incentives to manipulate short-term stock prices by creating positive earnings surprises (Levitt 1998). Insiders have two ways to create positive earnings surprises: (1) manage reported earnings upwards or (2) guide analyst forecasts downwards (Matsumoto 2002). Recent studies have shown that stronger governance suppresses insiders ’ management of reported earnings (Leuz et al. 2002; Bhattacharya et al. 2002), suggesting that it is likely to mitigate management of earnings surprises. However, nothing is known about the impact of governance mechanisms either on insiders ’ guidance of analysts or on their management of earnings surprises. Using data from 21countries, we show that managers of firms facing stronger governance are relatively more likely to both guide analysts ’ forecasts downward and create positive earnings surprises. We highlight an important unaddressed agency problem in the financial reporting process by showing that institutional governance

This paper addresses the issue of the accuracy of management earnings forecasts provided in Australian IPO propectuses, and whether the announcement of earnings forecast errors has information content influencing share price movements and investor wealth. This question is evaluated within the framework of a general return generating model similar to that employed by Pownall, Wasley and Waymire (1993), to identify whether IPO earnings forecast errors provide incremental predictive information content not previously known to the market. The results indicate a significant positive relationship between annnouncement-date raw and abnormal returns and earnings forecast errors, and a similarly significant relation between forecast errors and the threeday CAR around profit announcement date. There is also evidence suggesting an asymmetric abnormal return reaction to positive and negative forecast errors, constrasting to that of similar non-IPO studies. These findings suggest that management earnings forecast errors have significant information content relevant to share price and return determination for IPO companies.