Journal of Business Finance & Accounting, 33(5) & (6), 633–652, June/July 2006, 0306-686X doi: 10.1111/j.1468-5957.2006.00630.x Management of Earnings and Analysts’ Forecasts to Achieve Zero and Small Positive Earnings Surprises David Burgstahler and Michael Eames ∗ Abstract: This paper corroborates the finding of prior studies that managers avoid reporting earnings lower than analyst forecasts (i.e., negative earnings surprises) and provides new evidence of actions contributing to this phenomenon. Specifically, we provide empirical evidence of both (1) upward management of reported earnings and (2) downward ‘management’ of analysts’ forecasts to achieve zero and small positive earnings surprises. Further analysis of the components of earnings management suggests that both the operating cash flow and discretionary accruals components of earnings are managed. Keywords: earnings management, forecast management 1. INTRODUCTION Virtually every day, headlines and articles in the financial press focus attention on instances and consequences of realized earnings that differ from forecast earnings. Skinner and Sloan (2001) and Kinney, Burgstahler and Martin (2002) show significant stock price declines associated with even small negative earnings surprises. Bartov, Givoly and Hayn (2002), DeFond and Park (2000), Kasznik and McNichols (2000) and Lopez and Rees (2000) present evidence of positive market responses to meeting or beating analyst earnings forecasts. Consequently, there is substantial interest in the factors contributing to earnings surprises and related quality of earnings issues. * The authors are respectively Gerhard G. Mueller Endowed Professor in Accounting at the University of Washington and Associate Professor of Accounting, Santa Clara University. Helpful comments were provided by workshop participants at the University of Washington, the Ninth Annual Conference on Financial Economics and Accounting, and the 23 rd Annual Conference of the European Accounting Association, and, especially, Bob Bowen, Sandra Chamberlain, Jim Jiambalvo, Jane Kennedy, Mark Nelson, Gerald Salamon, and Terry Shevlin. The authors are especially thankful to Dawn Matsumoto for assistance in calculating her forecast management proxy. Financial support was provided by the Accounting Development Funds at the University of Washington and Santa Clara University. (Paper received November 2005, revised version accepted March 2006) Address for correspondence: Michael Eames, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053, USA. e-mail: meames@scu.edu C  2006 The Authors Journal compilation C  2006 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 633