Impact of Tournament Incentives on Management Earnings Forecasts

2021 ◽  
pp. 0148558X2110558
Author(s):  
Xin Cheng ◽  
Dan Palmon ◽  
Yinan Yang ◽  
Cheng Yin
Keyword(s):  
Rank Order ◽  
Earnings Forecasts ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Pay Gap ◽  
Top Executives ◽  
Research Designs ◽  
Chief Marketing Officers ◽  
Perceived Probability

This paper examines how rank-order tournament incentives in the top management team (TMT) influence the quality of management earnings forecasts (MEFs). Instead of breeding feelings of inequality and fostering peer sabotage, the large pay gap between the CEO and subordinates may motivate top executives to issue more accurate and precise forecasts to win the prize of promotion. The positive tournament effect on the quality of MEFs is weakened (strengthened) when the perceived probability of promotion for candidates is low (high). We find that firms with higher tournament incentives are more likely to issue supplementary forecasts to increase the credibility of MEFs. By examining the tournament effect at each subordinate manager level, we find that CFOs are the driving force in controlling the frequency and quality of management forecasts and chief marketing officers (CMOs) may also contribute to the quality of management forecasts. The results are robust to multiple measures of tournament incentives and multiple research designs.

scholarly journals The relationship between director independence, reputation and management earnings forecasts

2008 ◽  
Vol 6 (2) ◽  
pp. 404-419 ◽  
Author(s):  
Howard Chan ◽  
Robert Faff ◽  
Paul Mather ◽  
Alan Ramsay
Keyword(s):  
Audit Committee ◽  
Earnings Forecasts ◽  
Independent Director ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Governance Environment ◽  
Prior Literature ◽  
The Impact ◽  
Director Independence ◽  
The Relationship

Informative management earnings forecasts potentially reduce information asymmetries in capital markets. We examine the relationship between corporate governance and management earnings forecasts. We extend the prior literature by examining the impact of independent director reputation on characteristics of management forecasts, by refining the previously used proxy for director independence and by distinguishing between routine and non-routine forecasts in the Australian governance environment. We find a significant positive relationship between the likelihood and frequency of firms issuing management earnings forecasts and our measures of audit committee independence and independent director reputation but not board independence. However, there is some evidence that director independence is related to more specific forecasts. These results are driven by routine earnings forecasts over which, it is argued, management have greater discretion.

IFRS adoption, corporate governance and management earnings forecasts

2020 ◽  
Vol 18 (2) ◽  
pp. 325-342 ◽  
Author(s):  
Khawla Hlel ◽  
Ines Kahloul ◽  
Houssam Bouzgarrou
Keyword(s):  
Corporate Governance ◽  
Initial Public Offerings ◽  
Financial Reporting ◽  
Audit Committee ◽  
Earnings Forecasts ◽  
Forecast Errors ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Content Type ◽  
Ifrs Adoption

Purpose This paper aims to examine whether International Financial Reporting Standards (IFRS) adoption and corporate governance attributes increase the management earnings forecasts’ accuracy disclosed in prospectuses for French Initial Public Offerings (IPOs). Design/methodology/approach The analysis is based on cross-sectional regression explaining the absolute forecast errors by using 45 French firms that made IPOs between 2005 and 2016 in two French financial markets: Euronext and Alternext. Findings In agreement with the agency theory and the signaling theory, the authors find that the IFRS adoption and the effective corporate governance, proxied by the board characteristics, increase the accuracy of management forecasts. As a result, this latter gives a credible signal in constructing and sustaining shareholders’ trust on the transparency and the reliability of such financial information. Research limitations/implications It is plausible that the limited size of the sample represents a limitation of this study. Another limitation is that no other corporate governance attributes such as board meeting frequency, audit committee measures and ownership structure are used. Practical implications Shareholders can take benefit from management forecasts accuracy to structure their investment portfolios efficiently to allocate their funds more effectively and mitigate the costs of adverse selection that they have to face. Furthermore, the authors expect the findings to be interesting to IPO firms, as this study highlights the efficiency of larger and independent boards in decreasing managerial discretion, increasing disclosure quality and supervising management. The results could encourage GAAP-adopters countries to move toward IFRS, as this research reinforces the role of IFRS in enhancing the quality of financial disclosure by offering the required information for shareholders. Originality/value This study is important because the potential investors should assess management earnings forecasts accuracy before they consider it when evaluating IPO firms. Also, this paper has some implications for the financial market. It is recommended that future investors pay more attention, when assessing the accuracy of management earnings forecasts, to the accounting regulations of the financial reporting along with the corporate governance mechanisms. Moreover, this study could incite French regulators to revise the AFEP-MEDEF code. Under this code, it could insist that larger and independent boards are more effective in performing their governing roles than smaller boards.

scholarly journals Management Earnings Forecasts as a Performance Target in Executive Compensation Contracts

2017 ◽  
Vol 35 (1) ◽  
pp. 139-167 ◽  
Author(s):  
Shota Otomasa ◽  
Atsushi Shiiba ◽  
Akinobu Shuto
Keyword(s):  
Executive Compensation ◽  
Earnings Forecasts ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Initial Management ◽  
Compensation Contracts ◽  
Japanese Firms ◽  
Cash Compensation ◽  
Performance Target ◽  
A Performance

This article investigates whether and how Japanese firms use management earnings forecasts as a performance target for determining executive cash compensation. Consistent with the implications of the agency theory, we find that the sensitivity of executive cash compensation varies with the extent to which realized earnings exceed initial management forecasts. In particular, we find that the executive cash compensation is positively related to management forecast error ( MFE) for a sample of Japanese firms comprising 15,941 firm-year observations from 2005 to 2013. Moreover, we show that the relationship between executive cash compensation and MFE strengthens (weakens) when current realized earnings exceed (fall short of) aggressive initial forecasts. In additional analysis, we find that pay-for-performance sensitivity is weaker for extremely positive MFEs due to the ceiling on total cash compensation. Overall, we find that initial management forecasts can be used as a performance target in executive compensation contracts. These findings also suggest that management earnings forecasts are important for improving contract efficiency as well as for providing useful information to investors in the capital market.

Does customer satisfaction matter to managers’ earnings forecasts and stock returns?

2018 ◽  
Vol 52 (9/10) ◽  
pp. 2026-2051 ◽  
Author(s):  
Jenny (Jiyeon) Lee ◽  
Youngdeok Lim ◽  
Hyung Il Oh
Keyword(s):  
Customer Satisfaction ◽  
Stock Returns ◽  
Firm Value ◽  
Earnings Forecasts ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Marketing Metrics ◽  
Content Type ◽  
Study Results ◽  
The Impact

PurposeThe purpose of this study is to examine the relevance of American Customer Satisfaction Index (ACSI) to management voluntary forecasts of earnings. The authors further investigate whether the market reacts to such forecasts in respect of satisfaction.Design/methodology/approachThe authors’ econometric models are constructed from previous work in accounting to specify the effect of ACSI on the issuance and optimism of management forecasts. Our model also specifies the impact of management optimism with respect to ACSI on stock returns. The data consisting of US firms in the 2001-2010 is collated from several databases and analyzed using multiple regression procedures.FindingsResults indicate that ACSI is positively associated with the likelihood of issuing management forecasts and boosts management optimism. It is also found that investors react negatively to management optimism that is inherent in forecasts and results from satisfaction.Research limitations/implicationsThe authors’ research findings not only complement prior work on the linkage between customer satisfaction and firm value by incorporating a managerial perspective but also respond to the recent call for further work on how relevant marketing metrics drive organizational decisions and firms’ financial performance. It should be noted that findings are limited to firms that release both a voluntary issuance of management forecasts and ACSI.Practical implicationsThe study results shed light on the justification of marketing expenditures and provide a response to the call for marketing accountability. The study results also enable managers to make better decisions about whether and when to issue a forecast. The authors’ research further calls stakeholders’ attention to the presence of management forecast optimism with respect to satisfaction.Originality/valueDespite the importance of managers as primary information generators and disseminators in the capital markets, there appears to be little discussion on the satisfaction’s relevance to market participants, particularly in relation to the role of managers. Therefore, this investigation is the first to empirically show the relevance of ACSI to management earnings forecasts that have been ignored in the marketing literature.

scholarly journals The effect of disclosure regulation on the bias and accuracy of management earnings forecasts in Malaysian IPO prospectuses

2017 ◽  
Vol 15 (1) ◽  
pp. 59-77 ◽  
Author(s):  
Mohammed Abdullah Ammer ◽  
Nurwati A. Ahmad-Zaluki
Keyword(s):  
Initial Public Offering ◽  
Voluntary Disclosure ◽  
Earnings Forecasts ◽  
Management Earnings Forecasts ◽  
Multivariate Statistical ◽  
Disclosure Regulation ◽  
Content Type ◽  
Study Results ◽  
The Impact

Purpose This paper aims to examine the impact of disclosure regulation on the levels of bias and accuracy in management earnings forecasts disclosed in the prospectuses of Malaysian initial public offering (IPO). Specifically, the authors investigated the two environments of regulation (mandatory versus voluntary) to draw some conclusions regarding the benefits of regulating disclosure of management earnings forecasts. Design/methodology/approach A sample of 111 Malaysian IPOs listing on the Main Market of Bursa Malaysia from January 1, 2004 to February 29, 2012 was used. The paper uses both univariate and multivariate statistical analyses on this sample of IPOs. Findings The empirical results of these multivariate regressions indicated that disclosure regulation has positive and significant impact on the bias and accuracy of management earnings forecasts disclosed in IPO prospectus. In general, the study results suggest that using disclosure regulation to improve the quality of IPO earnings forecasts can be, to some extent, an effective strategy. Practical implications The findings of this study have important implications for regulators and investors. The findings can provide them some relevant insights on the improvements to the earnings forecasts accuracy and trends of the forecast (optimistic or pessimistic) after the change from mandatory to voluntary disclosure. Thus, the authorities may learn whether this change is an effective policy or whether the regime of mandatory disclosure was better for IPO companies and should be reversed. Originality/value This study is regarded as the first attempt to investigate the impact of reforms in disclosure regulation on the quality of management earnings forecasts of IPO prospectuses in a developing nation such as Malaysia. In spite of this, the paper focuses on a single country, and it contributes significant insights to the debate about the credibility of IPO management earnings forecasts.

scholarly journals Mandatory Financial Reporting and Voluntary Disclosure: The Effect of Mandatory IFRS Adoption on Management Forecasts

2015 ◽  
Vol 91 (3) ◽  
pp. 933-953 ◽  
Author(s):  
Xi Li ◽  
Holly I. Yang
Keyword(s):  
Financial Reporting ◽  
Voluntary Disclosure ◽  
Earnings Forecasts ◽  
Management Forecasts ◽  
Market Demand ◽  
Management Earnings Forecasts ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Mandatory Adoption ◽  
Disclosure Incentives

ABSTRACT This study examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) on voluntary disclosure. Using a difference-in-differences analysis, we document a significant increase in the likelihood and frequency of management earnings forecasts following mandatory IFRS adoption, consistent with the notion that IFRS adoption alters firms' disclosure incentives in response to increased capital-market demand. We find the increase to be larger among firms domiciled in code-law countries, suggesting a catching-up effect among firms facing low disclosure incentives pre-adoption. We then propose and test three channels through which IFRS adoption could alter firms' disclosure incentives: improved earnings quality, increased shareholder demand, and increased analyst demand. We find evidence consistent with all three channels.

Disaggregation and the Quality of Management Earnings Forecasts

2008 ◽  
Author(s):  
Clara Xiaoling Chen ◽  
Rajib Doogar ◽  
Laura Yue Li ◽  
Theodore Sougiannis
Keyword(s):  
Earnings Forecasts ◽  
Management Earnings Forecasts

scholarly journals Major government customer and management earnings forecasts

2020 ◽  
Vol 14 (1) ◽  
Author(s):  
Agnes C. S. Cheng ◽  
Wenli Huang ◽  
Shaojun Zhang
Keyword(s):  
Positive Impact ◽  
Earnings Forecasts ◽  
Price Impact ◽  
Management Earnings Forecasts ◽  
Publicly Traded ◽  
Public Companies ◽  
Publicly Traded Companies ◽  
Customer Base ◽  
The Us

Abstract This paper examines whether customer base composition in the US, that is, whether a firm’s major customers are government entities or publicly traded companies, affects the properties of its management earnings forecasts (MEFs). Using a sample of 1168 MEFs from 1998 to 2014, we find that firms whose major customers are government entities (i.e., government suppliers) issue more precise and more accurate MEFs than firms whose major customers are public companies (i.e., corporate suppliers). Moreover, when managers disclose negative information to the market, earnings forecasts issued by government suppliers have greater price impact than those issued by corporate suppliers. Collectively, our empirical results suggest that having major government customers has a positive impact on the quality of MEFs.

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