Accounting conservatism, changes in real investment, and analysts’ earnings forecasts

Abstract

This study examines whether sell-side analysts fully incorporate into their earnings forecasts the joint effects between accounting conservatism and changes in real investment on the quality of current earnings. Our results indicate that sell-side analysts do not fully incorporate such effects when they forecast future earnings so that they overestimate (underestimate) future earnings when current earnings are inflated (depressed) by those effects. Thus, we conclude that sell-side analysts do not recognize fully the joint effects between accounting conservatism and real activity on the earnings quality and that they need to mitigate their bias to enhance market efficiency by providing investors with a good benchmark for their earnings expectation.