Optimism & Pessimism Biases in Earnings Forecasting and Deviation in Financial Reporting: Evidence of Subjectivism and Opportunistic Unethical Behavior of Managers

Subject Areas : Ethics and accounting

Mohammad Hassani ¹ (Assistant Professor, Accounting, Department of Accounting & Auditing, Faculty of Management, North Tehran Branch, Islamic Azad University, Tehran, Iran)
Amir Hossein Haji Amiri ² (Master in Accounting, Faculty of Management, North Tehran Branch, Islamic Azad University, Tehran, Iran)

Received: 2021-08-13 Accepted : 2021-11-21 Published : 2021-11-22

Keywords: Financial Reporting, Earnings Forecast Biases, Optimistic Bias, Pessimistic Bias, Management Ethics,

Abstract :

Under a challenging business environment, assessing the managerial decisions about earnings forecasting and earnings reporting is important and the evidence indicates the occurrence of managers’ subjectivism in these areas. In this regard, analyzing the managers' behavior about earnings forecasting and earnings reporting can be explained through the signaling approach and opportunistic approach. This study assessed the relationship between optimism & pessimism biases in management earnings forecast and financial reporting distortion by focusing on managing the reported earnings to determine which of these approaches prevails in the surveyed firms. Management earnings forecast biases are measured using the pattern proposed by Cheng & Firth, (2000); also, the model presented by Dechow et al (1995) is used to assess the management incentives to manage earnings using discretionary accounting procedures & estimates.Research samples include 198 firms listed in Tehran Securities & Exchange over the period 2012-2018. Using multivariate regression models based on panel data, evidence indicated that there is a meaningful and positive relationship between management earnings forecast bias and financial reporting distortion using the earnings management based on discretionary accruals. This result indicates an interest conflict and occurrence of unethical opportunistic behavior due to the high subjectivism of managers. Also, the type of optimistic and pessimistic bias in management earnings forecast is meaningfully related to accruals-based earnings management; so, the motivation of managers to manage earnings in an optimistic situation is more than pessimistic. In addition, results of the test for equality of means between series showed that there is a meaningful difference between the means of earnings management based on discretionary accruals in optimistic and pessimistic earnings forecast situations.

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