Accounting Conservatism and Management Earnings Forecast

It is argued in the literature that accounting conservatism may be used as a substitute for management earnings forecasts (MEFs) to reduce information asymmetry between investors and management (Hui et al., 2009). We document in this study that accounting conservatism serves as a substitute for informative MEFs and especially for pessimistic MEFs, but not for opportunistic and optimistic forecasts. Accounting conservatism may, however, be used as supplementary to optimistic MEFs. Additionally, we find that accounting conservatism is especially used by the firms that have strong corporate governance, suggesting that strong corporate governance encourages the use of accounting conservatism rather than issuance of MEFs to reduce information asymmetry and to minimize potential legal suits for the firm