Abstract
This paper investigates the implications of earnings manipulations through real activities for financial analysts. In particular, it examines the extent to which analysts consider the effects of real earnings management on company performance when they make long-term earnings growth projections. Our results show analysts issue lower long-term earnings growth forecasts for firms with higher levels of real earnings management. In addition, we find analysts produce less accurate long-term earnings forecasts in the presence of real activities manipulation, and that the forecast bias increases with the level of real earnings management. Our results from the sensitivity tests confirm our findings that financial analysts are able to recognise real earnings management and penalise firms that engage in it when they issue long-term earnings growth forecasts.