Accounting Conservatism and Management Earnings Forecast

47 Pages Posted: 6 Apr 2013 Last revised: 15 Jan 2014

See all articles by Bikki Jaggi

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Hua Christine Xin

University of Louisville

Date Written: January 14, 2014

Abstract

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.

Keywords: Accounting Conservatism, Informative/Non-Informative Management Earnings Forecast, Pessimistic/Optimistic MEF

Suggested Citation

Jaggi, Bikki and Xin, Hua Christine, Accounting Conservatism and Management Earnings Forecast (January 14, 2014). 2014 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=2246168 or http://dx.doi.org/10.2139/ssrn.2246168

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100B Rockafeller Road
Piscataway, NJ 08854
United States

Hua Christine Xin (Contact Author)

University of Louisville ( email )

School of Accountancy #137
College of Business
Louisville, KY Kentucky 40292
United States
(502)852-4816 (Phone)

HOME PAGE: http://business.louisville.edu/faculty-and-staff-directory/acct/

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