Faculty Scholarship 1994 - Present

Do Management Forecasts Help Detect Earnings Management?

This study examines the relationship between discretionary accruals and managers? choice of whether to disclose cash flow forecasts with earnings forecasts. Empirically, this paper conducts both cross-sectional analysis and time-series analyses. In a cross-sectional analysis, it finds a significant negative relation between discretionary accruals and the choice of issuing cash flow forecasts along with earnings forecasts. The result is consistent with the hypothesis that companies who issue both management earnings forecasts and cash flow forecasts would be more reluctant to manipulate earnings through discretionary accruals than companies who only issue management earnings forecasts. Similarly, in a time-series analysis, this study also finds a significant negative relation between discretionary accruals and the choice of issuing both cash flow forecasts and earnings forecasts. The result supports the hypothesis that the discretionary accruals of the same company are lower at the time it issues both cash flow forecasts and earnings forecasts than at the time it only issues earnings forecasts. This research contributes to literature by providing new evidence how accounting information from voluntary disclosure impacts earnings management. It also enriches the literature on the consequences of management forecasts.