Exploring Managers’ Accrual-Related Forecast Optimism
University of Arkansas - Sam M. Walton College of Business
Linda A. Myers
The University of Tennessee, Knoxville
Thomas C. Omer
University of Nebraska at Lincoln - School of Accountancy
Nathan Y. Sharp
Texas A&M University - Department of Accounting
In this study, we examine the effect of accrual-based earnings management on the relation between managers’ earnings forecast optimism and accruals (which we label “managers’ accrual-related forecast optimism”). We build on extensive research which finds that managers inflate accruals to meet or beat earnings benchmarks and suggest that managers’ accrual-related forecast optimism can arise because managers issue optimistic forecasts in an attempt to justify inflated accruals. Consistent with expectations, we find that managers’ earnings forecast optimism is positively associated with discretionary accruals (which proxy for accrual-based earnings management) but not with nondiscretionary accruals. Furthermore, managers’ accrual-related forecast optimism is stronger when earnings management constraints are high. Finally, we find a substantial decline in managers’ accrual-related forecast optimism following the enactment of the Sarbanes-Oxley Act of 2002 which restricted managers’ use of accrual-based earnings management. Overall, our results suggest that managers’ accrual-related forecast optimism is at least in part due to intentional decisions made by managers and is not simply a product of forecasting difficulty related to accruals.
Number of Pages in PDF File: 44
Keywords: management earnings forecasts, managers’ accrual-related forecast optimism, earnings management, disclosure quality
JEL Classification: M41, M43, M48, G14, G18
Date posted: December 22, 2011 ; Last revised: May 21, 2013
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