Prior research hypothesizes that managers use a variety of ‘real actions’ to manage reported earnings to meet or beat certain key benchmarks. Combining two years of new supermarket scanner data for a commodity consumer product with firm-level financial data, I find evidence consistent with the hypothesis of price discounting around the fiscal quarter-end. Firms that just beat prior year quarterly Earnings per Share or Analyst Consensus Earnings Forecasts reduce prices in the final month of the fiscal quarter to do so even when controlling for the effects of a competing hypothesis that firms adjust prices when inventory levels are unusually high.

Also examined are the effects of earnings management related price reductions on subsequent reporting periods and on competitor pricing behavior. I find that price reductions associated with a single earnings management target are persistent over multiple reporting periods and that competitors also reduce prices when a firm has greater incentives to accelerate earnings.

These findings suggest the effects of Real Earnings Management on subsequent reporting periods and competitor behavior are greater than previously thought and make contribute to both the marketing and accounting literature in the following ways:

· analyzing the effect of price discounts on earnings as opposed to the effect on sales volumes and revenues;

· demonstrating evidence that firms manufacturing durable goods reduce prices (an increase in promotional activities) when incentives to boost earnings are stronger;

· offering direct evidence of the actions taken to manage earnings, as opposed to the prior research which uses Abnormal Cash Flow from Operations as a proxy for earnings management actions;

· providing evidence that firms change pricing behavior in response to competitor earnings management incentives;

· showing that price reductions associated with earnings management become persistent and can be repeated as much as twelve months later.

Using a new supermarket scanner data set for multiple product categories, this paper shows a relation between subsequent firm performance (in terms of earnings and stock prices) and retail prices. In a period of economic slowdown, these effects are different for price changes which are made at a firm’s fiscal year-end than at other times of the year consistent with year-end price changes being associated with earnings management behavior. Further, these effects vary depending on how severe prior-year price changes were as well as the price elasticity of demand for each individual product.

Prior research shows that firms use a variety of real actions to increase short-term earnings. However, the effects on subsequent firm performance are less well studied. This is due, in part, to the possibility that the firm may be able to repeat the earnings management behavior in successive periods making it especially hard to detect subsequent weak performance. The economic conditions involving an increase in many input prices and general slowdown in demand during 2008 suggest that firms which have engaged in real earnings management behavior in the past may be less able to successfully repeat these actions in this period and may therefore report less positive earnings than those firms not engaging in the same practices. As such, it is more likely that subsequent poor performance will be observed for firms managing their earnings in 2008 than in periods of steady economic growth.

This paper considers firms whcih use price changes as a method of affecting reported earnings and how these alleged earnings management behaviors affect their performance in subsequent periods.

Jimmy Fu is interviewing for a job at Moog, Inc., a worldwide designer, manufacturer, and integrator of precision motion and fluid controls and systems. He learns that a job offer from Moog typically includes stock options and restricted stock in the compensation package. The vesting and termination language for the stock plan leads Jimmy to investigate the Shareholders' Equity section of the Moog balance sheet, where he finds more activity than he expected. The case introduces students to the concepts of employee stock options, stock-splits and buybacks, multiple share classes, and the basics of equity investment and diversification. Students must complete a quantitative analysis of the financial transactions related to Shareholders' Equity. Primary Objective is to introduce students to the different components of the Shareholders' Equity section of the Balance Sheet, to understand employee stock options, multiple share classes, and certain basics of equity investment, risk, and diversification.

The case is designed to be used in an introductory financial accounting course to explore the differential effects of LIFO and FIFO accounting on inventory valuation. Discussions can also explore the ethical questions which may arise as managers consider changes in accounting policies.