Prior research hypothesizes managers use 'real actions,' including reduction of discretionary expenditure, to manage earnings to meet or beat key benchmarks. This thesis examines this hypothesis by testing how marketing expenditures are used to boost earnings for a durable commodity consumer product which can be easily stockpiled by end-consumers. I extend the study to consider who, within the firm, is responsible for changes in marketing activity, how competitors respond and whether the behavior persists over time.
Combining supermarket scanner data with firm-level financial data, I find evidence which differs from prior literature. Instead of reducing expenditures to boost earnings, soup manufacturers roughly double the frequency of marketing promotions (price discounts, feature advertisements and aisle displays) at the fiscal year-end. Firms also engage in similar behavior following periods of poor financial performance and use price reductions at the end of fiscal quarters to meet or beat prior year quarterly Earnings per Share or Analyst Consensus Earnings Forecasts.
Although increased marketing actions can boost quarterly earnings, there is a price to pay. The cost of lost sales in the subsequent reporting period exceeds the short-term earnings lift associated with the increased promotion. This effect leads to a prediction that firms may be required to repeat price discounts in subsequent reporting periods. Empirical tests show this to be the case.
Firms are also affected by the earnings management incentives of their competitors. Results show that firms discount prices when more of their competitors face earnings management incentives.
Finally, a unique aspect of the research setting allows tests of who is responsible for the earnings management. While firms appear unable to increase the frequency of aisle display promotions in the short run, they can reallocate these promotions within their portfolio of brands. Results show firms shifting display promotions away from smaller revenue brands toward larger ones following periods of poor financial performance. This indicates the behavior is determined by parties above brand managers in the firm.
These findings are consistent with firms engaging in Real Earnings Management and suggest the effects on subsequent reporting periods and competitor behavior are greater than previously documented.
|School Location:||United States -- Massachusetts|
|Source:||DAI-A 69/09, Dissertation Abstracts International|
|Keywords:||Competitive response, Earnings management, Incentives, Real earnings management|
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