Accounting Conservatism And Management Earnings Forecast
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| Author | : Bikki Jaggi |
| Publisher | : |
| Total Pages | : |
| Release | : 2019 |
| Genre | : |
| ISBN | : |
It is argued in the literature that accounting conservatism may be used as a substitute for management earnings forecasts (MEFs) to reduce information asymmetry between investors and management (Hui et al., 2009). We document in this study that accounting conservatism serves as a substitute for informative MEFs and especially for pessimistic MEFs, but not for opportunistic and optimistic forecasts. Accounting conservatism may, however, be used as supplementary to optimistic MEFs. Additionally, we find that accounting conservatism is especially used by the firms that have strong corporate governance, suggesting that strong corporate governance encourages the use of accounting conservatism rather than issuance of MEFs to reduce information asymmetry and to minimize potential legal suits for the firm.
| Author | : Jinhan Pae |
| Publisher | : |
| Total Pages | : 40 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
Recent studies show that accounting earnings are conservative, i.e., earnings tend to reflect bad news (negative stock returns) on a timelier basis than good news (positive stock returns) (Basu, 1997); moreover, the degree of conservatism is negatively associated with the price-to-book (P/B) ratio (Pae et al., 2003). If analysts correctly allowed for conservatism and its documented association with the P/B ratio, differences in earnings conservatism would be unassociated with analysts' forecast error. In contrast, we find that average yearend forecast error differs between good news and bad news firms, and between high and low P/B firms. We conclude that analysts' earnings forecasts do not fully incorporate the implications of earnings conservatism. We also find that forecast dispersion is greater for bad news than good news firms, and greater for low than high P/B firms, consistent with the hypothesis that accruals used to accelerate the recognition of bad news spawn disagreement about forthcoming earnings.
| Author | : Ralf Ewert |
| Publisher | : |
| Total Pages | : 142 |
| Release | : 2012 |
| Genre | : Business & Economics |
| ISBN | : |
Earnings Management, Conservatism, and Earnings Quality reviews and illustrates earnings management, conservatism, and their effects on earnings quality in an economic modeling framework. Both earnings management and conservative accounting introduce biases to financial reports. The fundamental issue addressed is what economic effects these biases have on earnings quality or financial reporting quality. Earnings Management, Conservatism, and Earnings Quality reviews analytical models of earnings management and conservatism and shows that both can have beneficial or detrimental economic effects, so a differentiated view is appropriate. Earnings management can provide additional information via the financial reporting communication channel, but it can also be used to misrepresent the firm's position. What the authors find is that similar to earnings management, conservatism can reduce the information content of financial reports if it suppresses relevant information, but it can be a desirable feature that improves economic efficiency. The approach to study earnings management, conservatism, and earnings quality is based on the information economics literature. A variety of analytical models are reviewed that capture the effects and subtle interactions of managers' incentives and rational expectations of users. The benefit of analytical models is to make precise these, often highly complex, strategic effects. They offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. The monograph is organized around a few basic model settings, which are presented in simple versions first and then in extensions to elicit the main insights most clearly. Chapter 2 presents the basic rational expectations equilibrium model with earnings management and rational inferences by the capital market. Chapter 3 is devoted to earnings quality and earnings quality metrics used in many studies. Chapter 4 studies conservatism in accounting. Finally, the authors examine the interaction between conservatism and earnings management. Each chapter ends with a section containing a summary of the main findings and conclusions.
| Author | : Bikki Jaggi |
| Publisher | : |
| Total Pages | : 53 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Accounting conservatism has been recognized as a reporting strategy that benefits shareholders and financial statement users. We hypothesize that managers in general are likely to sacrifice the benefit associated with accounting conservatism when adopting meeting/beating market expectations (hereafter MBME). Our findings show a negative association between MBME, proxied by analysts' consensus forecasts, and accounting conservatism, defined in terms of conditional conservatism (Basu, 1997; Ball and Shivakumar, 2005, 2006) and we show that such relationship is not a mechanical connection between reporting strategy and managerial incentives to report higher earnings. Further analysis show that the negative relationship still exists after controlling for expectation as well as accrual-based and real earnings management. However, we document that G-index (Gompers et al., 2003), reflecting corporate governance in terms of anti-takeover provisions, has a significant impact on the negative association between accounting conservatism and MBME. Such finding shows that firms with less anti-takeover provisions, proxied by G-index, are less likely to sacrifice the benefit associated with conservative accounting for MBME.
| Author | : Carlo D’Augusta |
| Publisher | : Springer Nature |
| Total Pages | : 89 |
| Release | : |
| Genre | : |
| ISBN | : 3031671457 |
| Author | : Ralf Ewert |
| Publisher | : |
| Total Pages | : 133 |
| Release | : 2012 |
| Genre | : Earnings management |
| ISBN | : 9781601986030 |
This monograph reviews economic models that study earnings management and conservatism in an information economics framework. Both introduce a deliberate or a mandatory bias in financial reports. The fundamental issue this monograph addresses is what economic effects these biases have on earnings quality. We focus on models of managers in firms interacting with rational capital market participants, and briefly consider some contracting models. The models allow us to analyze earnings management and rational inferences by market participants in equilibrium in a variety of settings and to pinpoint costs and benefits of earnings management. We discuss how investors can elicit the maximum information from the biased reports and what potential remedies actually achieve in equilibrium. For example, accounting standards that reduce discretion for earnings management may be detrimental from a welfare point of view. In rational expectations models earnings quality can be defined as the information content in reported earnings. We discuss the earnings response coefficient, value relevance, and accounting-based earnings quality measures and how they reflect changes in earnings quality. Further, we review analytical work on conservatism of accounting standards and why conservatism can be welfare-enhancing even though it introduces a bias in the earnings reports. It is exactly through this bias that the benefit arises. Therefore, a differentiated view of earnings management and conservatism is warranted; neither is principally desirable or undesirable, but this depends on the circumstances. The benefit of equilibrium models is that they offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. There exist subtle interactions between accounting standards, the institutional environment, and earnings management that lead to several insights that challenge conventional wisdom. The models describe the economics behind these results and the particular circumstances.
| Author | : Hwa Deuk Yi |
| Publisher | : |
| Total Pages | : 236 |
| Release | : 1994 |
| Genre | : Corporate profits |
| ISBN | : |
| Author | : Kunio Ito |
| Publisher | : Springer |
| Total Pages | : 337 |
| Release | : 2014-07-08 |
| Genre | : Business & Economics |
| ISBN | : 4431547924 |
Despite the globalization of accounting standards occurring through convergence to International Financial Reporting Standards, local accounting systems are deeply intertwined with each country’s unique institutions such as its corporate system, disclosure practices and enforcement mechanisms. First, this book empirically analyzes the effects of globalization and localization of accounting rules on corporate behavior such as earnings management, signaling, investment behavior and dividend payout policy. Second, the book unravels the economic consequences of disclosure based on the concept of self-disciplining enforcement such as management forecasts, environmental disclosures and risk disclosures by Japanese firms. This volume is a step forward in understanding the link between accounting and corporate behavior based on a new institutional accounting approach.
| Author | : Wei Su |
| Publisher | : |
| Total Pages | : 244 |
| Release | : 2006 |
| Genre | : Business enterprises |
| ISBN | : |
| Author | : Sebastian Gell |
| Publisher | : Springer Science & Business Media |
| Total Pages | : 144 |
| Release | : 2012-03-26 |
| Genre | : Business & Economics |
| ISBN | : 3834939374 |
Earnings forecasts are ubiquitous in today’s financial markets. They are essential indicators of future firm performance and a starting point for firm valuation. Extremely inaccurate and overoptimistic forecasts during the most recent financial crisis have raised serious doubts regarding the reliability of such forecasts. This thesis therefore investigates new determinants of forecast errors and accuracy. In addition, new determinants of forecast revisions are examined. More specifically, the thesis answers the following questions: 1) How do analyst incentives lead to forecast errors? 2) How do changes in analyst incentives lead to forecast revisions?, and 3) What factors drive differences in forecast accuracy?
