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

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Nội dung chi tiết: Are the forecast errors of stock prices related to the degree of accounting conservatism?

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

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?recast errors of stock prices related to the degree of accounting conservatism?Chen-Yin Kuo1AbstractInstead of existing research studying the relation

between forecast errors and either of two accounting-conservatism forms (unconditional, conditional) respectively, this paper studies the relation be Are the forecast errors of stock prices related to the degree of accounting conservatism?

tween forecast errors and two forms simultaneously, and finds that the relation varies across industries. For large industries, when a Finn adopts hig

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

her unconditional conservatism and lower conditional conservatism. forecast errors are smaller. Small industries show that a Finn with lower unconditi

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?sm appear to be related. This information could be of interest to both investors and firm managers.JEL classification numbers: C32. G30Keywords: Accou

nting conservatism; Unconditional conservatism; Conditional conservatism; Forecast errors; Stock prices1 IntroductionIn the stock market, forecast (or Are the forecast errors of stock prices related to the degree of accounting conservatism?

prediction) errors may lead to the fluctuation in market prices, reducing shareholder wealth, inducing corporate failures because of decreases in mar

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

ket capitalization. Prior research studies how to improve forecast accuracy and finds that forecast errors may be affected by accounting conservative

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?. Tung Fang Design University. No.i 10. Dongfang Rd.. Hunei Dist.. Kaohsiung city 82941. Taiwan (R.O.C.)Article Info: Received. July 21. 2018. Revised

: August 10. 2018 Published online: November 1, 2018202Chen-Yin Kuoare divergent. Some argue that effect of conservatism on forecast (prediction) erro Are the forecast errors of stock prices related to the degree of accounting conservatism?

rs are negative (Sohn 2012; Kim el al. 2013; Pae and Thornton 2010), and positive (Mensah et al., 2004; Pae and Thornton. 2010; Callen Ct al., 2010).

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

Effects of accounting conservatism on valuation are positive (Sohn, 2012; Lin et al., 2014; Cheng, 2005b; Basu, 1997; LaFond and Walls, 2008; Walls, 2

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?ed on two forms of conservatism: news-independent and unconditional conservatism (UC); news-dependent and conditional conservatism (CC) (Beaver and Ry

an, 2005). cc caplures a linn’s earnings’ asymmetric timeliness in news recognition based on lhe sign of the news . uc indicates immediately expensing Are the forecast errors of stock prices related to the degree of accounting conservatism?

R&D investment and expected long-run understatement of book value of net assets relative to market value (Fellham and Ohlson 1995). cc is negatively

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

related lo unconditional conservatism. Lower (Higher) unconditional conservatism leads lo higher (lower) conditional conservatism (Qiang, 2007). ƯC pr

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?re related to uc as well as forecast errors are related to cc. negatively or positively. In addition, uc and cc are negatively related.We observe two

gaps from above studies. First, existing research finds that the relations between forecast errors and each of two conservative forms respectively are Are the forecast errors of stock prices related to the degree of accounting conservatism?

positive or negative. However, few studies explore the relation between forecast errors and two forms simultaneously. Accounting conservatism reduces

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

a manager's discretion to manipulate earnings, decreasing the volatility of earnings, making stock price forecast errors smaller. In contrast, conser

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?ses two forms of conservatism simultaneously, due to the over- conservative reporting, could the forecast errors become smaller or greater? This inter

esting problem motivates US to study the relation between forecast errors and two forms of conservatism simultaneously. Second, analysts’ earnings for Are the forecast errors of stock prices related to the degree of accounting conservatism?

ecast is used to predict stock return (Sohn, 2012). Existing research confirms the relation between conservatism and “analysis' earnings forecast erro

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

r'’; however, few studies explore lhe relation between conservatism and “slock price forecast error’. In short, above gaps motivate US to investigate

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?hree contributions to lhe literature. First, Illis paper investigates lhe relation between forecast errors of2 The research includes Basu (1997), Kous

enidis er al. (2009) and LaFond and Watts (200S). Conditional conservatism steins from the definition of Basu (1997) that negative news (negative retu Are the forecast errors of stock prices related to the degree of accounting conservatism?

rns) is recognized faster in earnings than positive news (positive returns).Are the forecast errors of stock prices related to rhe degree of...203sloc

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

k price and two forms of conservatism simultaneously, which is not explored in previous research. Second, ihis paper studies the relation between cons

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?hird, in practice, forecast errors and accounting conservatism appear to be related. This information could be of interest to both investors and firm

managers.This study differs from previous research in Ollier ways. First, unlike existing studies applying Ordinary T.east Squares (OT.S) regression a Are the forecast errors of stock prices related to the degree of accounting conservatism?

nd cross-sectional (or pooled) data, this paper utilizes longitudinal data and time series methodologies - vector error correction model (VECMs) (Engl

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

e and Granger. 1987), which can identify changes in forecast errors from short-run to long-run forecast horizons. Second, although this paper applies

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?studying how to use the superiority of VECM over OLS regression to reduce forecast errors. Third, unlike prior research (Mensah el al., 2004; Pae and

Thornton, 2010; Sohn, 2012) using a variety of industries, this paper chooses five industries data.This paper models trivariate VECMs using quarterly Are the forecast errors of stock prices related to the degree of accounting conservatism?

stock market data from the Taiwan Economic Journal (TEJ) database. The stocks under investigation include five sectors: electronics and components (ET

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

C); electric machinery (EM); tex tile (TEX); glass and ceramics (GC); and oil, gas. and electricity (OGE)’. We model the high-and-low level VECMs usin

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?s in forecasting economic studies are employed to evaluate forecast errors of the VECMs. One tool is root mean squared error (RMSE) and mean absolute

error (MAE) (Meese and Rogoff, 1983). The other is Diebold-Mariano lest (Diebold and Mariano, 2002).The main findings of this paper are as follows. Th Are the forecast errors of stock prices related to the degree of accounting conservatism?

e relation between forecast errors and the two forms of conservatism vary across industries. For large industries (ETC, EM, TEX), when a firm adopts h

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

igher unconditional conservatism and lower conditional conservatism, forecast errors are smaller, in accordance with negative effects of uc on forecas

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?industries (GC, OGE), a firm with lower unconditional conservatism and higher conditional conservatism has smaller forecast errors.The above findings

can be explained by the following. The large industries arc likely to be more visible, have a large analyst following, and thus have less information Are the forecast errors of stock prices related to the degree of accounting conservatism?

asymmetry. Higher unconditional conservatism (UC) is likely to be• The ETC, EM, and GC data cover the period from 1995Q1 to 2015Q4. while the TEX and

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

OGB data span from 19S6Q1 to 2015Q4.204Chen-Yin Kuointerpreted properly, pre-empt and reduce the impact of any bad news. Consequently, higher ƯC and l

Journal of Applied Finance & Banking, vol. 8, no. 6, 2018, 201-242 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd. 2018Are the for

Are the forecast errors of stock prices related to the degree of accounting conservatism?e more profound information asymmetry. Higher uc may not cause over-reaction but not necessarily reduce the impact of bad news. As a result, higher cc

and lower ƯC may work better in reducing forecast error.The robustness tests of using OLS regression and DM test support above findings. For the prac Are the forecast errors of stock prices related to the degree of accounting conservatism?

tical implications, forecast errors and accounting conservatism seem to be related. This information could be of interest to both investors and firm m

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

anagers.The remainder of this paper is organized as follows. Section 2 reviews the previous literature, section 3 presents our methodology and data, s

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