Journal of Applied Finance & Banking

Are the forecast errors of stock prices related to the degree of accounting conservatism?

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  • Abstract 

    Instead of existing research studying the relation between forecast errors and either of two accounting-conservatism forms (unconditional, conditional) respectively, this paper studies the relation between forecast errors and two forms simultaneously, and finds that the relation varies across industries. For large industries, when a firm adopts higher unconditional conservatism and lower conditional conservatism, forecast errors are smaller. Small industries show that a firm with lower unconditional conservatism and higher conditional conservatism has smaller forecast errors. These findings imply that forecast errors and accounting conservatism appear to be related. This information could be of interest to both investors and firm managers.

    JEL classification numbers: C32, G30
    Keywords: Accounting conservatism; Unconditional conservatism; Conditional conservatism; Forecast errors; Stock prices