Earnings Performance And Interim Reporting

This study documents that interim period earnings performance is relatively favorable to year-end earnings performance. Earnings performance is measured as the difference between reported earnings and the Value Line forecast. Additional analysis indicates the observed difference is due to a positive interim earnings performance bias not any particular negative year-end earnings performance bias. Interim earnings are found to be overstated on average about five cents per interim quarter. Previous studies have argued that since only year-end earrings are audited, they include adjustments for misstatements of previously reported interim earnings (as a result of errors, poor estimates, misallocations, etc.). The results here support the notion that management may have incentive to overstate interim (unaudited) earnings, and may do so by delaying the announcement of bad news, and/or making optimistic estimates of full fiscal year amounts requisite for interim period reporting purposes.