Auditor Conservatism and Analysts' Fourth Quarter Earnings Forecasts

Journal of Accounting and Finance Research, 2005, Vol. 13 No. 5, 211-235

25 Pages Posted: 3 May 2014

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Lee-Seok Hwang

Seoul National University - College of Business Administration

Ching-Lih Jan

California State University, East Bay

Date Written: December 2005

Abstract

We argue that accounting conservatism makes earnings forecasting difficult by introducing transitory components in reported earnings. These transitory components are likely to be disproportionately represented in firms reporting losses. We show that analysts’ mean forecast errors and absolute forecast errors for loss firms are substantially greater than those for profit firms in every single quarter, regardless of the forecast horizon. We argue that auditors’ legal liability incentives make it likely that fourth quarter earnings are more conservative than interim quarter earnings. Forecast errors are always higher for loss firms in the fourth quarter compared to earlier quarters. Using special items to proxy for transitory components induced by conservatism, we document similar results for firms reporting special items, partitioned by the sign of the special items. Our results are consistent with auditor conservatism affecting fourth quarter earnings differentially, which causes analysts’ earnings forecasts to be poorest for the fourth quarter.

Suggested Citation

Basu, Sudipta and Hwang, Lee-Seok and Jan, Ching-Lih, Auditor Conservatism and Analysts' Fourth Quarter Earnings Forecasts (December 2005). Journal of Accounting and Finance Research, 2005, Vol. 13 No. 5, 211-235. Available at SSRN: https://ssrn.com/abstract=2428829

Sudipta Basu (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Lee-Seok Hwang

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Ching-Lih Jan

California State University, East Bay ( email )

25800 Carlos Bee Boulevard
Hayward, CA 94542
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
98
Abstract Views
568
rank
265,427
PlumX Metrics