| Conservative accounting results in a downward bias in reported earnings and net assets in times of investment growth. Prior research has shown that analysts do not fully understand this downward bias, which may partially explain the observed optimism in their earnings forecasts. Managers, faced with the pressure to meet or just beat analysts' earnings expectations, have an incentive to issue earnings guidance that may influence analysts to adjust their forecasts for the effect of conservatism. This paper examines how accounting conservatism affects managers' forecasting behavior. First, I find that both the likelihood of a firm issuing management earnings forecasts and the forecast frequency increase in the level of conservatism. Second, I investigate whether management earnings forecasts inform analysts about the downward bias in earnings caused by accounting conservatism. I find that the news in management forecasts, measured relative to the prevailing analyst consensus, is negatively correlated with the level of conservatism. Further, this correlation varies with changes in asset growth, consistent with managers conveying the complex effect of changes in growth on conservatively reported earnings that is likely to be misestimated by analysts. Finally, I find that, subsequent to the issuance of management earnings forecasts, analysts revise their forecasts to incorporate the effect of accounting conservatism conveyed by management forecasts. Overall, the evidence suggests that managers provide earnings guidance which conveys information about the effect of accounting conservatism that is not fully recognized by analysts. |
