Do Analyst Earnings Forecasts Allow for Accounting Conservatism?

40 Pages Posted: 20 Jan 2004

See all articles by Jinhan Pae

Jinhan Pae

Korea University Business School (KUBS)

Daniel B. Thornton

Smith School of Business at Queen's University

Date Written: September 2003

Abstract

Recent studies show that accounting earnings are conservative, i.e., earnings tend to reflect bad news (negative stock returns) on a timelier basis than good news (positive stock returns) (Basu, 1997); moreover, the degree of conservatism is negatively associated with the price-to-book (P/B) ratio (Pae et al., 2003). If analysts correctly allowed for conservatism and its documented association with the P/B ratio, differences in earnings conservatism would be unassociated with analysts' forecast error. In contrast, we find that average yearend forecast error differs between good news and bad news firms, and between high and low P/B firms. We conclude that analysts' earnings forecasts do not fully incorporate the implications of earnings conservatism. We also find that forecast dispersion is greater for bad news than good news firms, and greater for low than high P/B firms, consistent with the hypothesis that accruals used to accelerate the recognition of bad news spawn disagreement about forthcoming earnings.

JEL Classification: G29, M41, M43, M44

Suggested Citation

Pae, Jinhan and Thornton, Daniel B., Do Analyst Earnings Forecasts Allow for Accounting Conservatism? (September 2003). 14th Annual Conference on Financial Economics and Accounting (FEA). Available at SSRN: https://ssrn.com/abstract=488173 or http://dx.doi.org/10.2139/ssrn.488173

Jinhan Pae (Contact Author)

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Daniel B. Thornton

Smith School of Business at Queen's University ( email )

143 Union Street, #358
Kingston, Ontario K7L 3N6
Canada
613-328-5213 (Phone)
613-533-2321 (Fax)

HOME PAGE: http://smith.queensu.ca

Register to save articles to
your library

Register

Paper statistics

Downloads
915
rank
23,950
Abstract Views
3,618
PlumX Metrics