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Information Uncertainty and Critical Accounting Policies and Estimates

Conference paper
Authors Elizabeth A. Gordon
Xinjie Ma
Emmeli Runesson
Published in American Accounting Association: Annual meeting, Washington DC
Publication year 2018
Published at Department of Business Administration, Accounting
Language en
Keywords Financial reporting, information uncertainty, analyst earnings forecast, 10-K filings, CAPE disclosures, text analysis
Subject categories Business Administration

Abstract

We examine the relation between critical accounting policies and estimates (CAPE) disclosures in the Form 10-K and information uncertainty, measured as analyst forecast errors and dispersion. CAPE disclosures can either be associated with 1) greater information uncertainty as they reveal unknown estimation uncertainties, 2) less information uncertainty as they resolve known estimation uncertainties, or 3) have no effect on information uncertainty because of their discretionary and boilerplate nature. Using computerized content analysis, we create indices of estimation words, accounting topics, and language specificity. We find more estimation words are associated with higher analyst forecast errors and dispersion (consistent with the first prediction). When more specific language is used or an accounting topic is specified in conjunction with estimation words, forecast errors and dispersion are reduced (consistent with the second prediction). This paper contributes to the literature by explicitly considering the effect of accounting disclosures of estimation uncertainty on analyst forecast properties.

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