Accounting Conservatism and Management Earnings Forecasts

• In Event: Accounting Conservatism: Outcomes and Identification

Abstract

Hui et al. (2009) document that there is a negative association between the frequency of management earnings forecasts (MEFs) and accounting conservatism, and they interpret their findings to suggest that accounting conservatism acts as a substitute for MEFs. But all MEFs are not the same (Li, et al. 2012), and we document in this study that accounting conservatism does not act as a substitute for opportunistic MEFs, which are identified based on the methodology suggested by Li. et al. (2012). Our findings show a negative association between the frequency of MEFs and accounting conservatism for informative MEFs only and not for opportunistic MEFs. Additionally, we examine the association between accounting conservatism and direction of MEF, and document that accounting conservatism is negatively associated with pessimistic MEFs, but positively associated with optimistic MEFs, suggesting that accounting conservatism acts as a substitute for pessimistic MEFs, but it has a complementary effect on the optimistic MEFs. We also document that firms with strong corporate governance are more associated with accounting conservatism than MEFs for reducing information asymmetry.

Authors

• Hua Xin, Rutgers, The State University of New Jersey, Newark

• Bikki Jaggi, Rutgers, The State University of New Jersey, Newark

• Joshua Ronen, New York University