Reducing information asymmetry between managers and the market can benefit firms, as many firms well know. Those seeking external financing or reporting greater earnings growth are more likely to disclose financial information, and disclosure has also been shown to have a positive impact on share price. It's also linked to better corporate governance and CEO share ownership.

Given all that, there is interest in how information is revealed. The Securities Litigation Reform Act in 1995 encouraged voluntary management earnings forecasts. Yet Kai-Lung Hui and his co-researchers, Steve Matsunaga and Dale Morse, argue that accounting conservatism can also do the job of reducing information asymmetry.

"Conservative accounting may substitute for management forecasts by reducing information asymmetry and uncertainty about future earnings," they say.

"It does this by increasing the speed with which negative information is revealed in the earnings numbers. Conservative financial statements are also less likely to be manipulated to overstate earnings. Similarly, conservatism increases the predictability of earnings by anticipating all losses, thereby reducing future uncertainty about whether losses will be realised."

The authors support this view by analysing data from 2,244 firms from 1997-2002. The firms issued a median of five quantitative forecasts over the period. Other research had argued that conservative accounting would lead managers to issue more forecasts to correct for the probability of unexpectedly low earnings and analyst response to that, but the authors find quite the opposite.

They compare book-to-market ratio, an accrual measure and a combination of inventory, research and development and advertising reserves with forecasts, to gauge the conservatism of each firm's accounting system. They also combine the data to provide a broad overview. "Taken together, the evidence suggests that conservatism reduces the frequency of management forecasts," they say.

Moreover, conservatism also affects the specificity and timeliness of forecasts. A manager facing a lower degree of information asymmetry or lower legal costs will face less demand for information and therefore issue less specific forecasts (for example, issuing range forecasts rather than point forecasts), and the results bear this out.

Timeliness, in terms of responding to bad news, is also affected. Since conservative accounting accelerates the recognition of bad news in financial reports, it reduces information asymmetry. It can also reduce the perceived litigation risk thereby reducing a manager's need to pre-empt the issuance of bad news with a forecast. While conservatism reduces forecasts for both good and bad news, the magnitude of the effect is significantly higher for bad news.

"We have found evidence that conservatism influences the forecasting decision by reducing the degree of information asymmetry in the market and reducing management's legal exposure from withholding bad news. The reduction in turn alters management's forecasting strategy," they say.