Earnings management or forecast guidance to meet analyst expectations?

We examine whether UK firms engage in earnings management or forecast guidance over theperiod 1994−2002 in order to ensure that their reported earnings meet analyst earnings expectations.We explore two earnings management mechanisms: a) the use of positive abnormal working capitalaccruals and b) classification shifting of core expenses to non-recurring items. We find no evidenceof a positive association between income-increasing abnormal working capital accruals and theprobability of meeting analyst forecasts. Instead we find evidence consistent with larger firmsshifting small core expenses to other non-recurring items to just hit analyst expectations with coreearnings. We also find that the probability of meeting analyst expectations increases with downwardguided forecasts....