THE NUMBERS GAME: HOW DO MANAGERS COMPENSATED WITH STOCK OPTIONS MEET ANALYSTS’ EARNINGS FORECASTS? Mark P. Bauman, Mike Braswell and Kenneth W. Shaw ABSTRACT Existing research documents that firms employing relatively high levels of stock option-based compensation more frequently report quarterly earn- ings that meet or exceed analysts’ forecasts. This paper examines the roles of income-increasing accounting choices and management guidance to analysts in this ‘‘numbers game.’’ Our analysis is motivated by in- creased capital market and Securities and Exchange Commission (SEC) scrutiny of the effects of both stock option-based compensation and fi- nancial analysts in capital markets. Using a sample of S&P 1500 firms over 1992–2002, we find that firms that compensate top managers more heavily with stock options employ expectations-reducing guidance to financial analysts, not income-increasing abnormal accounting accruals, to enable them to more frequently meet analysts’ earnings targets. The results suggest that rule-making and enforcement aimed at curbing Research in Accounting Regulation, Volume 18, 3–28 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1052-0457/doi:10.1016/S1052-0457(05)18001-1 3