Adaptability culture and meeting or beating analysts’ estimates

Zebian, Talal; Harris, Terry; Abdelsalam, Omneya

Abstract

This paper investigates the relationship between adaptability culture and the propensity of US publicly listed firms to meet or beat analysts’ expectations. We develop a novel firm- level measure of adaptability culture using textual analysis of 10-K reports, employing a bag-of-words methodology based on the Denison Model. Our hypothesis posits that adaptable firms, subject to higher analyst coverage, are
more inclined to meet or beat earnings estimates—a proposition supported by the empirical results. Further analysis reveals that adaptability culture is positively associated with real earnings management practices. Notably, during the COVID-19 pandemic, adaptable firms exhibited a shift towards accrual-based earnings
management to prevent negative earnings surprises, reflecting the dynamic nature of their financial reporting strategies. These findings suggest that while adaptability culture can enhance firms’ resilience in meeting market expectations, it may also encourage opportunistic behaviour in financial reporting. Our study contributes to the literature on corporate culture, earnings management, and analysts’ expectations, offering insights into how corporate adaptability influences financial reporting practices. The findings have significant implications for regulators and auditors, highlighting the need for enhanced monitoring and control measures to mitigate potential opportunistic behaviour stemming from adaptability-driven cultures. This research underscores the importance of considering corporate culture in assessing the quality and reliability of financial reporting.

Citation

Zebian, T., Harris, T., & Abdelsalam, O. (online). Adaptability culture and meeting or beating analysts’ estimates. Review of Quantitative Finance and Accounting, https://doi.org/10.1007/s11156-024-01351-8

• Journal Article Type: Article
• Acceptance Date: Sep 1, 2024
• Online Publication Date: Oct 16, 2024
• Deposit Date: Oct 17, 2024
• Publicly Available Date: Oct 17, 2024
• Journal: Review of Quantitative Finance and Accounting
• Print ISSN: 0924-865X
• Electronic ISSN: 1573-7179
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1007/s11156-024-01351-8
• Public URL: https://durham-repository.worktribe.com/output/2961670