Management earnings forecasts and accounting conservatism

Abstract

In a recent paper, Hui, Matsunaga, and Morse have argued that managers may prefer using accounting conservatism instead of issuing management earnings forecasts (MFs) that may reduce information asymmetry and may lower firms’ potential legal liability. We argue in this article that accounting conservatism serves as a substitute only for informative forecasts, which are classified as cost of capital (COC) MFs, and it does not serve as a substitute for opportunistic (OPP) MFs and disclose or abstain (DOA) MFs that are required under 1933 Securities Exchange Act because both these types of MFs are used to achieve different objectives. Our findings confirm our claim that conservatism serves as a substitute for informative MFs only.