Corporate financial reporting and taxes: How important is prior performance?

Research Question: How do firms behave after significantly missing or exceeding analysts’<br>earnings estimates in terms of managing earnings and avoiding taxes?<br><br>Motivation: Prior research provides strong evidence suggesting that managers are motivated<br>to perform at or above analysts' expectations and steer earnings higher to prevent unpleasant<br>earnings surprises. Prior studies have also documented that firms are likely to manage their<br>earnings when they are close to meeting or missing analysts’ expectations. However, little is<br>known about how firms behave after either substantially missing or beating analyst earnings<br>estimates.<br><br>Idea: This study provides evidence on firms’ earnings management and tax avoidance<br>activities subsequent to the year in which firms substantially fail or succeed meeting analysts’<br>earnings consensus forecasts.<br><br>Data: The data were collected from a sample of South Korean firms listed on the Korean<br>Composite Stock Price Index for the years between 2013 and 2020.<br><br>Tools: Multiple panel data regressions and robustness tests were conducted. Propensity score<br>matching is also used to minimize endogeneity related problems.<br><br>Findings: Firms are more likely to manage their earnings upward subsequent to significantly<br>missing analysts’ expectations. However, their tendency to avoid taxes is lower.<br><br>Contribution: Little has been explored on how firms significantly missing analysts’<br>expectations could behave in the subsequent period. The findings reported in this study have<br>important implications for regulators, investors, and auditors. This research is also different<br>from most prior related studies in terms of its setting.