The Stewardship Role of Analyst Forecasts, and Discretionary Versus Non-Discretionary Accruals

32 Pages Posted: 18 Mar 2011

See all articles by Peter O. Christensen

Peter O. Christensen

Copenhagen Business School - Department of Finance

Hans Frimor

Aarhus University; University of Southern Denmark - Department of Business and Economics

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems

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Date Written: March 15, 2011

Abstract

We examine the interaction between discretionary and non-discretionary accruals in a stewardship setting. Contracting includes multiple rounds of renegotiation based on contractible accounting information and non-contractible but more timely non-accounting information. We show that accounting regulation aimed at increasing earnings quality from a valuation perspective (earnings persistence) may have a significant impact on how firms rationally respond in terms of allowing accrual discretion in order to alleviate the impact on the stewardship role of earnings. Increasing the precision of more timely non-accounting information (analyst earnings forecasts) increases the ex ante value of the firm and reduces costly earnings management. There is an optimal level of reversible non-discretionary accrual noise introduced through revenue recognition policies. Tight rules-based accounting regulation, as opposed to leaving firms more choice over non-discretionary accrual policies, may lead firms to rationally respond by inducing costly earnings management. More generally, regulating both earnings persistence and the tightness of admissible auditing policies may not result in less equilibrium earnings management.

Keywords: Stewardship, Analyst forecasts, Earnings Management, Renegotiation, Discretionary and Nondiscretionary, Accruals, Accounting Regulation

Suggested Citation

Christensen, Peter Ove and Frimor, Hans and Frimor, Hans and Sabac, Florin, The Stewardship Role of Analyst Forecasts, and Discretionary Versus Non-Discretionary Accruals (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786621 or http://dx.doi.org/10.2139/ssrn.1786621

Peter Ove Christensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark
+45 6140 3237 (Phone)

Hans Frimor

Aarhus University ( email )

Department of Economics and Business
Bartholins Allé 10
Aarhus DK-8000
Denmark
+45 8942 2141 (Phone)

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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