Accounting professor Sung Gon Chung’s paper accepted in Review of Accounting and Finance
Accounting professor Sung Gon Chung’s paper, titled “Analysts’ Reactions to Firms’ Real Activities Management,” has been accepted for publication in the Review of Accounting and Finance. The paper’s abstract is below.
The Review of Accounting and Finance publishes high-quality research papers covering a wide range of accounting and finance topics, offering a global perspective on issues including:
- the role of accounting internal and external communications on capital market valuation
- asset pricing
- corporate financial decision making
- users' and preparers' behavior and public policy
Previous studies show that real activities management (RAM) became more widespread as accounting regulations became tighter (e.g., the Sarbanes-Oxley Act), although RAM has more detrimental effects on firms’ future performance than accounting earnings management. We examine whether security analysts, who play an important role as information intermediaries, understand the negative effect of RAM on firms’ future performance and respond accordingly. Using the RAM measures developed by Roychowdhury (2006), we show that analysts lower future earnings forecasts and stock recommendations of the firms that show signs of RAM. Our study provides evidence supporting that RAM is closely watched by analysts and that firms with RAM are potentially penalized with lower earnings forecasts and recommendation downgrades in the market.