The association between management earnings forecast errors and accruals

Guojin Gong, Laura Yue Li, Hong Xie

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate the association between errors in management forecasts of subsequent year earnings and current year accruals. In an uncertain operating environment, managers' assessments of their firms' business prospects are imperfect. Since managers' imperfect business assessments influence both accruals generation and earnings projection, we hypothesize that management earnings forecasts exhibit greater optimism (pessimism) when accruals are relatively high (low). Consistent with this hypothesis, we find a positive association between management earnings forecast errors and accruals. This positive association is stronger for firms operating in a more uncertain business environment and for firms in industries exhibiting greater covariation between accruals and growth-related activities. Moreover, this positive association is significant when accruals likely reflect managers' true beliefs about firms' business prospects, but is nonexistent when accruals are likely manipulated to boost managers' trading gains. Supplementary analysis reveals that the presence of management earnings forecasts does not significantly reduce accrual mispricing.

Original languageEnglish (US)
Pages (from-to)497-530
Number of pages34
JournalAccounting Review
Volume84
Issue number2
DOIs
StatePublished - Mar 2009

Keywords

  • Accruals
  • Management earnings forecasts
  • Mandatory disclosure
  • Voluntary disclosure

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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