Management's incentives to avoid negative earnings surprises.

Accounting Review,  July, 2002  by Dawn A. Matsumoto

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After a particularly grim presentation by CEO Bill Gates and sales chief Steve Ballmer at an analysts' meeting two years ago, Goldman Sachs analyst Rick Sherlund ran into the pair outside and said, "Congratulations. You guys scared the hell out of people." Their response? "They gave each other a high five," Sherlund recalls. (Fox 1997)

I. INTRODUCTION

Recent articles in the business press suggest that managers of some firms place great importance on meeting or exceeding analysts' expectations, which they achieve either by using their discretion over reported earnings to meet expectations (earnings management) or by guiding analysts' earnings forecasts ...