scholarly journals The Roles that Forecast Surprise and Forecast Error Play in Determining Management Forecast Precision

2010 ◽  
Vol 24 (2) ◽  
pp. 165-188 ◽  
Author(s):  
Jong-Hag Choi ◽  
Linda A. Myers ◽  
Yoonseok Zang ◽  
David A. Ziebart
Keyword(s):  
Voluntary Disclosure ◽  
Forecast Error ◽  
Absolute Magnitude ◽  
Negative Association ◽  
Bad News ◽  
Good News ◽  
Forecast Errors ◽  
Negatively Associated ◽  
Management Forecast ◽  
Forecast Precision

SYNOPSIS: Studying the determinants of management forecast precision is important because a better understanding of the factors affecting management’s choice of forecast precision can provide investors and other users with cues about the characteristics of the information contained in the forecasts. In addition, as regulators assess the regulation of voluntary management disclosures, they need to better understand how managers choose among forecast precision disclosure alternatives. Using 16,872 management earnings forecasts collected from 1995 through 2004, we provide strong evidence that forecast precision is negatively associated with the magnitude of the forecast surprise and that this negative association is stronger when the forecast is bad news than when it is good news. We also find that forecast precision is negatively associated with the absolute magnitude of the forecast error that proxies for the forecast uncertainty that managers face when they issue forecasts, and that the negative association is stronger when forecast errors are negative. These results are consistent with greater liability concerns related to bad news forecasts and negative forecast errors, respectively. Our study provides educators and researchers with important insights into management’s choice of earnings forecast precision, which is a component of the voluntary disclosure process that is not well understood.

The Effect of Beating and Missing Analysts' Forecasts on the Information Content of Unexpected Earnings

2002 ◽  
Vol 17 (2) ◽  
pp. 155-184 ◽  
Author(s):  
Thomas J. Lopez ◽  
Lynn Rees
Keyword(s):  
Information Content ◽  
Stock Prices ◽  
Forecast Error ◽  
Earnings Forecasts ◽  
Bad News ◽  
Market Response ◽  
Forecast Errors ◽  
Unexpected Earnings ◽  
Systematic Component ◽  
History Of

This study investigates whether the market rewards (penalizes) firms for meeting (not meeting) analysts' earnings forecasts. Specifically, we examine the market response to positive and negative forecast errors. In addition, we examine whether the sensitivity of stock prices to positive or negative forecast errors is affected by the firms' history of consistently beating or missing analysts' forecasts. The results indicate that the earnings multiple applied to positive unexpected earnings is significantly greater than for negative unexpected earnings. In addition, we find that after controlling for the magnitude of the forecast error and bad news preannouncements, the market penalty for missing forecasts is significantly greater in absolute terms than the response to beating forecasts. We document evidence that, while the market recognizes and partially discounts the systematic component of positive analysts' forecast errors, a higher multiple is attached to the unsystematic component of unexpected earnings of firms that consistently beat analysts' forecasts. Overall, the evidence suggests that the increasing frequency of positive forecast errors as documented in previous research is a rational response by managers to market-related incentives.

Discretionary Aggregation

2016 ◽  
Vol 92 (1) ◽  
pp. 73-91 ◽  
Author(s):  
Michael Ebert ◽  
Dirk Simons ◽  
Jack D. Stecher
Keyword(s):  
Private Information ◽  
Voluntary Disclosure ◽  
Bad News ◽  
Good News ◽  
News Source ◽  
Hide Information ◽  
Many Sources ◽  
Jel Classifications

ABSTRACT We study a disclosure decision for a firm's manager with many sources of private information. The presence of multiple numerical signals provides the manager with an opportunity to hide information via aggregation, presenting net amounts in order to show information in its best light. We show that this ability to aggregate fundamentally changes the nature of voluntary disclosure, due to the market's inability to verify that a report is free of strategic aggregation. We find that, in equilibrium, the manager fully discloses if and only if the manager's private information makes the firm look sufficiently weak. By separating bad news from good news, a disaggregate report informs the market of as much offsetting news as possible, revealing how close the news is to a neutral benchmark. The result is, therefore, pooling at the top and separation at the bottom, the opposite of what transpires with a single news source. JEL Classifications: M41; D82; D83.

Benefits of management disclosure precision on analysts’ forecasts

2014 ◽  
Vol 13 (4) ◽  
pp. 371-399 ◽  
Author(s):  
Yu-Ho Chi ◽  
David A. Ziebart
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Forecast Errors ◽  
Management Earnings Forecasts ◽  
Earnings Guidance ◽  
Short Term ◽  
Content Type ◽  
Management Forecast ◽  
Forecast Precision ◽  
The Impact

Purpose – The purpose of this paper is to examine the impact of management’s choice of forecast precision on the subsequent dispersion and accuracy of analysts’ earnings forecasts. Design/methodology/approach – Using a sample of 3,584 yearly management earnings per share (EPS) forecasts and 10,287 quarterly management EPS forecasts made during the period of 2002-2007 and collected from the First Call database, the authors controlled for factors previously found to impact analysts’ forecast accuracy and dispersion and investigate the link between management forecast precision and attributes of the analysts’ forecasts. Findings – Results provide empirical evidence that managements’ disclosure precision has a statistically significant impact on both the dispersion and the accuracy of subsequent analysts’ forecasts. It was found that the dispersion in analysts’ forecasts is negatively related to the management forecast precision. In other words, a precise management forecast is associated with a smaller dispersion in the subsequent analysts’ forecasts. Evidence consistent with accuracy in subsequent analysts’ forecasts being positively associated with the precision in the management forecast was also found. When the present analysis focuses on range forecasts provided by management, it was found that lower precision (a larger range) is associated with a larger dispersion among analysts and larger forecast errors. Practical implications – Evidence suggests a consistency in inferences across both annual and quarterly earnings forecasts by management. Accordingly, recent calls to eliminate earnings guidance through short-term quarterly management forecasts may have failed to consider the linkage between the attributes (precision) of those forecasts and the dispersion and accuracy in subsequent analysts’ forecasts. Originality/value – This study contributes to the literature on both management earnings forecasts and analysts’ earnings forecasts. The results assist in policy deliberations related to calls to eliminate short-term management earnings guidance.

scholarly journals An empirical study of the relationship between earnings forecasts and risk profile

2016 ◽  
Vol 6 (4) ◽  
pp. 274-281
Author(s):  
Malekian Kale Basti Esfandiar ◽  
Vahdani Mohammad
Keyword(s):  
Significant Relationship ◽  
Stock Exchange ◽  
Traditional Approach ◽  
Forecast Error ◽  
Share Price ◽  
Forecast Errors ◽  
Company Performance ◽  
Business Risk ◽  
Management Forecast ◽  
The Relationship

A new approach to examine the relationship between the excess of forecast based on characteristics toward management forecast and business risk is provided in this research at companies listed on the stock exchange in Tehran.The customary (traditional (approach is based on the regression of management forecast errors of past years. Therefore, the observable and unobservable inputs, such as managements, incentive misalignment, are used to predict management forecast errors. In this study, the future earnings is at first estimated by using characteristics including earnings per share, loss indicator, Neg. accruals per share , Pos. accruals per share ,asset growth , dividend indicator (non-payment of the dividend), Book-to-market value, share price and dividend per share for companies. Based on that, a criterion (CO) for estimating the earnings forecast error was developed, which is the alternative forecasted errors. One should notice that, business risk is considered as a measure of company performance. In this study, measures of business risk are volatility of earnings and dividend ratio. Research findings show that, there is a significant relationship between the CO and volatility of earnings, on the contrary there is no significant relationship between this criteria and dividend ratio.

Voluntary Disclosure Incentives and Earnings Informativeness

2012 ◽  
Vol 87 (5) ◽  
pp. 1679-1708 ◽  
Author(s):  
Sugata Roychowdhury ◽  
Ewa Sletten
Keyword(s):  
Voluntary Disclosure ◽  
Information Source ◽  
Data Availability ◽  
Bad News ◽  
Good News ◽  
Cross Sectional ◽  
Earnings Differential ◽  
Earnings Informativeness ◽  
Negative News ◽  
Disclosure Incentives

ABSTRACT We propose that the value of the earnings reporting process as an information source lies in limiting delays in the release of bad news, either by inducing managers to disclose it voluntarily or by directly releasing the negative news that managers have incentives to withhold. We compare earnings informativeness in bad-news and good-news quarters. Using returns to measure news, we find, consistent with our prediction, that earnings informativeness relative to other sources is higher in bad-news quarters than in good-news quarters. Further, cross-sectional tests indicate that earnings differential informativeness in bad-news quarters is more pronounced when managers do not voluntarily disclose the news, information asymmetry is stronger, and managers are net sellers of stock. JEL Classifications: G3; M4; M40; M41; M48. Data Availability: Data are available from Compustat, CRSP, First Call, I/B/E/S, ISSM, TAQ, and Thompson Financial.

scholarly journals Shareholder Litigation and the Information Content of Management Voluntary Disclosure

2019 ◽  
Vol 95 (5) ◽  
pp. 279-298
Author(s):  
Yuanyuan Ma
Keyword(s):  
Information Content ◽  
Private Information ◽  
Voluntary Disclosure ◽  
Legal Liability ◽  
Bad News ◽  
Good News ◽  
Voluntary Disclosures ◽  
Shareholder Litigation

ABSTRACT I study the information content of management voluntary disclosures disciplined by shareholder litigation. I model the litigation mechanism in which legal liabilities are based on the damages that shareholders suffer from buying a stock at an inflated price. I find that management does not fully reveal private information in equilibrium. Instead, their disclosures reveal only a range in which their private information lies. Thus, the precision of information is, to some extent, lost. Notably, increasing the severity of legal liability does not always reduce the loss of precision. In fact, when the legal liability reaches a certain level, more severe legal liability will result in less precise disclosures. I also find that good news and bad news have different precision. Specifically, good news is more precise than is bad news when legal liabilities are high, and bad news is more precise than is good news when legal liabilities are low.

The Effect of Voluntary Disclosure and Preemptive Preannouncements on Earnings Response Coefficients (ERC) When Firms Manage Earnings

2003 ◽  
Vol 18 (3) ◽  
pp. 379-409 ◽  
Author(s):  
Joshua Ronen ◽  
Tavy Ronen ◽  
Varda (Lewinstein) Yaari
Keyword(s):  
Earnings Management ◽  
Voluntary Disclosure ◽  
Bad News ◽  
Good News ◽  
Earnings Response Coefficients ◽  
Earnings Response Coefficient ◽  
Earnings Surprise ◽  
Response Coefficient ◽  
Earnings Response ◽  
Disclosure Strategy

We study analytically the effect of preliminary voluntary disclosure and preemptive preannouncement on the slope of the regression of returns on earnings surprise—the earnings response coefficient (ERC). When firms do not manage earnings, additional disclosure has no effect, and the ERC is proportional to price/permanent earnings ratio. If they manage earnings by attempting to inflate them, the response to (100% credible) negative earnings surprise is stronger than the response to (less than 100% credible) positive surprise. To avert litigation, firms that manage earnings adopt a partial voluntary disclosure strategy—either public revelation of good news and withholding bad news, or public revelation of bad news and withholding good news. Voluntary disclosure affects ERC on positive earnings surprise only, depending on what the firm reveals: the good- news revealing ERC (GRC) is higher than the bad-news revealing ERC (BRC), because good news enhances the credibility of the positive earnings surprise, even though the market discounts good news. Furthermore, preemptive pre-announcements improve ERC accuracy by narrowing the scope of earnings management.

Total Hip Arthroplasty: Good News, Bad News

2011 ◽  
Vol 10 (5) ◽  
pp. 58
Author(s):  
MARY ANN MOON
Keyword(s):  
Total Hip Arthroplasty ◽  
Hip Arthroplasty ◽  
Bad News ◽  
Good News ◽  
Total Hip
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