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Exploring Managers’ Accrual-Related Forecast Optimism

45 Pages Posted: 22 Dec 2011 Last revised: 7 Jun 2017

Sami Keskek

University of Arkansas - Sam M. Walton College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: February 2015

Abstract

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.

Keywords: management earnings forecasts, managers’ accrual-related forecast optimism, earnings management, disclosure quality

JEL Classification: M41, M43, M48, G14, G18

Suggested Citation

Keskek, Sami and Myers, Linda A. and Omer, Thomas C., Exploring Managers’ Accrual-Related Forecast Optimism (February 2015). Available at SSRN: https://ssrn.com/abstract=1975122 or http://dx.doi.org/10.2139/ssrn.1975122

Sami Keskek

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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