Accounting Conservatism and Management Earnings Forecasts

• In Event: Financial Accounting and Reporting 7

Abstract

Hui et al. (2009) recently documented that accounting conservatism acts as a substitute for voluntarily disclosed management earnings forecasts (MEF). In this study we argue that accounting conservatism does not serve as a substitute for all MEFs. Instead it serves as a substitute for informative forecasts and not for opportunistic forecasts. We identify opportunistic and informative MEF based on the methodology suggested by Li, et al. (2012). Additionally, we document that accounting conservatism also serves as a substitute for MEF which are lower than analyst consensus forecasts. It, however, complements the MEFs that are higher than analyst consensus forecasts. Moreover, we report that corporate governance plays an important in the choice between conservative accounting and MEF to reduce information asymmetry. Firms with strong corporate governance, proxied by a higher percentage of independent directors on their boards and by a higher investor protection reflected by E-index, prefer the use of accounting conservatism than issuing MEF.

Authors

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

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