An information perspective on earnings conservatism and analysts' forecast errors

This study investigates whether financial analysts incorporate the information of accounting earnings conservatism to forecast firms' annual earnings. Specifically, we examine how information of the conservatism affects short- and longer-term earnings forecasting process done by financial analysts. While the studies of Basu [3] and Helbok and Walker [7] suggest that each firm has a different level of information sensitivity to accounting earnings conservatism, the relevant studies document that financial analysts do not appropriately incorporate firm specific information for longer-term earnings forecasting. As approaching to fiscal year end, financial analysts properly incorporate more firm specific relevant information to forecast earnings. As expected, we find that longer-term forecast errors are more negative ('optimistic') to bad news of firms with high level of information sensitivity of accounting earnings conservatism, which is consistent with the empirical evidence that financial analysts do not consider the probability of good or bad news of current year at the beginning of the year in forming their earnings forecasts.