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Accounting Conservatism and Managers' Forecasting Behavior
Zining Li,
University of Minnesota / Southern Methodist University
ABSTRACT. This paper examines how accounting conservatism affects managers’ forecasting behavior. First, I find that both the likelihood of a firm issuing management earnings forecasts and the forecast frequency increase in the level of conservatism. Second, I investigate whether management earnings forecasts inform analysts about the downward bias in earnings caused by accounting conservatism. I find that the news in management forecasts, measured relative to the prevailing analyst consensus, is negatively correlated with the level of conservatism. Further, this correlation varies with changes in asset growth, consistent with managers conveying the complex effect of changes in growth on conservatively reported earnings that is likely to be misestimated by analysts. Finally, I find that, subsequent to the issuance of management earnings forecasts, analysts revise their forecasts to incorporate the effect of accounting conservatism conveyed by management forecasts.
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