Accounting Method Heterogeneity and Analysts’ Forecasts

We examine whether accounting methods atypical within an industry affect analysts’ forecasts of future performance for a firm. Following a rich literature on accounting methods, our objective is to contribute evidence on the extent to which accounting method variability impacts information processing activities of financial statement users. We construct an index that measures how different a firm’s portfolio of accounting methods is from its industry peers. We predict and find that the use of atypical accounting methods is associated with larger analyst forecast errors and increased forecast dispersion, consistent with variation in accounting procedures imposing processing costs on external users. ‡ University of Chicago § University of Michigan ♀ Harvard Business School * We thank participants at the Columbia University Burton Workshop, Duke University, Michigan State University, University of British Columbia, University of Connecticut and University of Utah for extremely helpful comments. Ted Christensen, Trevor Harris, and John Phillips provided particularly valuable insights and comments on the first draft. All errors and omissions are our responsibility.