Practice of accounting conservatism in MBE firms

Abstract

Managers sometimes manage earnings upward (i.e., engage in earnings management) or guide analyst forecasts downward (i.e., engage in expectation management) to meet or beat analysts’ earnings forecasts (MBE). Our results suggest that certain management behavior to achieve MBE is highly associated with firms’ level of accounting conservatism. In detail, we find that (1) the level of accounting conservatism decreases as firms achieve MBE in consecutive years, (2) engaging in earnings management to achieve MBE lowers firms’ level of conservatism, and (3) firms that achieve MBE in consecutive years (CMBE firms) whose credit rating had been elevated practice less conservative accounting implying that the MBE string itself might act as a substitute for conservative accounting in lowering firms’ cost of debt.