The impact of conservatism on management earnings forecasts
We investigate the empirical relation between a firm's accounting conservatism and management's issuance of quantitative earnings forecasts. Using three measures of conservatism from prior literature, along with two aggregate measures, we find a negative association between conservatism and the frequency, specificity, and timeliness of management forecasts. The results are robust to estimating the regression in changes, using firm fixed-effects, and using a two-stage instrumental variables approach. Overall, these results suggest that accounting conservatism acts as a substitute for management forecasts by decreasing information asymmetry in the market and reducing potential litigation through the timely reporting of bad news.
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- Nagar, Venky & Nanda, Dhananjay & Wysocki, Peter, 2003. "Discretionary disclosure and stock-based incentives," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 283-309, January.
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- Bipin Ajinkya & Sanjeev Bhojraj & Partha Sengupta, 2005. "The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 343-376, 06.
- Gu, Zhaoyang & Wu, Joanna Shuang, 2003. "Earnings skewness and analyst forecast bias," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 5-29, April.
- Irene Karamanou & Nikos Vafeas, 2005. "The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 453-486, 06.
- Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
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