Justin Davis, assistant professor of business administration at Washington and Lee University, recently co-authored an article that was published in the Journal of Economics, Finance and Administrative Science.
The article, titled “Institutional ownership, earnings management, and earnings surprises: Evidence from 39 years of U.S. data,” assesses specific data studied by Davis and his doctoral advisor Miguel García-Cestona. The pair co-wrote the paper as part of Davis’ dissertation.
Davis and García-Cestona conducted a study using a large sample of firm-year observations to analyze the relation between institutional investor ownership and earnings management, which can be described as manipulating publicly reported earnings to avoid missing forecasted levels. Missing these predicted levels often results in strong negative market reaction.
“I was surprised that the research demonstrated such strong visual evidence of earnings manipulation,” said Davis. “We graph the frequency of the levels of reported earnings per share minus forecasted earnings per share of all observations. In the absence of earnings management, we would expect about the same number of observations to barely miss the analyst forecasts (and suffer a negative market reaction) and barely beat the analyst forecasts (and avoid a negative market reaction). However, more than twice as many observations barely beat the analyst forecasts. There is also unnatural choppiness occurring on the side of missing the analyst forecast where earnings manipulation is likely occurring as expected.”
Davis is in his second year as a member of the W&L faculty. He holds a bachelor’s degree in business management economics from the University of California, Santa Cruz, as well as a master’s degree and doctorate from Universitat Autònoma de Barcelona.
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