Do Analysts Understand Conservatism?

Abstract

This study investigates whether analysts understand accounting conservatism.  It is well documented that financial reporting system exhibits conservatism, that is, bad news are recognized in earnings in a more timely manner than good news.  We find that analysts’ short-term earnings forecasts exhibit similar conservatism as the accounting earnings.  We further find that as the forecast horizon increases the conservatism becomes weaker.  On the contrary, the analysts’ long-term forecasts are not conservative.  Collectively, the results suggest analysts do understand accounting conservatism.