The Association Between Management Earnings Forecast Errors and Accruals

52 Pages Posted: 13 Oct 2008

See all articles by Guojin Gong

Guojin Gong

Penn State University - Smeal College of Business

Laura Yue Li

University of Illinois at Urbana-Champaign

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: October 9, 2008

Abstract

We investigate the association between errors in management forecasts of subsequent year earnings and current year accruals. In an uncertain operating environment, managers' assessments of their firms' business prospects are imperfect. Since managers' imperfect business assessments influence both accruals generation and earnings projection, we hypothesize that management earnings forecasts exhibit greater optimism (pessimism) when accruals are relatively high (low). Consistent with this hypothesis, we find a positive association between management earnings forecast errors and accruals. This positive association is stronger for firms operating in a more uncertain business environment and for firms in industries exhibiting greater covariation between accruals and growth-related activities. Moreover, this positive association is significant when accruals likely reflect managers' true beliefs about firms' business prospects, but is nonexistent when accruals are likely manipulated to boost managers' trading gains. Supplementary analysis reveals that the presence of management earnings forecasts does not significantly reduce accrual mispricing.

Keywords: voluntary disclosure, management earnings forecasts, mandatory disclosure, accruals

JEL Classification: M41, M43, M45, G14

Suggested Citation

Gong, Guojin and Li, Yue Laura and Xie, Hong, The Association Between Management Earnings Forecast Errors and Accruals (October 9, 2008). Available at SSRN: https://ssrn.com/abstract=1281681 or http://dx.doi.org/10.2139/ssrn.1281681

Guojin Gong (Contact Author)

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Yue Laura Li

University of Illinois at Urbana-Champaign ( email )

283 Wohlers hall 1206 South Sixth Street
1206 South Sixth Street
Champaign, IL 61820
United States
2172655086 (Phone)

Hong Xie

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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