effect of income-increasing earnings management on analysts' responses

As a consequence of financial analysts' joint role as information intermediaries and firm monitors, I investigate analysts' responses to opportunistic corporate earnings management as firm mispricing increases. While firms' management have capital markets and executive equity incentives to manage earnings, financial analysts have trading volume, investment banking, and management information incentives which result in analysts' optimism bias. However, prior research also finds that analysts have reputational incentives, which motivate them to provide accurate and profitable outlooks. Using a generalized linear model (GLM), I estimate analysts' stock recommendation (price targets) responses for earnings management firms. I use the residual income model to compute fundamental value and I add proxies for earnings management to my analyst-responses models.... The main implications of my findings are that analysts use corporate earnings management and firm fundamental value in their stock recommendations (price targets) responses. In addition, my results provide evidence that, after controlling for earnings quality, analysts' stock recommendations (price targets) are consistent with strategies based on residual income models. These findings will be of interest to shareholders, regulators, and researchers as well as to finance and accounting practitioners.