Credibility of Management Forecasts

2005 ◽  
Vol 80 (4) ◽  
pp. 1233-1260 ◽  
Author(s):  
Jonathan L. Rogers ◽  
Phillip C. Stocken
Keyword(s):  
Insider Trading ◽  
Financial Distress ◽  
Stock Price ◽  
Earnings Forecasts ◽  
Industry Concentration ◽  
Management Forecasts ◽  
Management Earnings Forecasts ◽  
Forecast Bias ◽  
Price Response ◽  
Trading Activities

We examine how the market's ability to assess the truthfulness of management earnings forecasts affects how managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying predictable forecast bias. We find managers' willingness to misrepresent their forwardlooking information as a function of their incentives varies with the market's ability to detect misrepresentation. We examine incentives induced by the litigation environment, insider trading activities, firm financial distress, and industry concentration. With regard to the stock price response to forecasts, we find the market varies its response with the predictable bias in the forecast. The efficiency of the market's response, however, varies with the forecast news.

Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

2021 ◽  
Author(s):  
Amy Hutton ◽  
Phillip C Stocken
Keyword(s):  
Stock Price ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Bad News ◽  
Market Forces ◽  
Management Earnings Forecasts ◽  
Forecasting Accuracy ◽  
Price Response ◽  
Management Forecast ◽  
Investor Reaction

We examine the properties of firms’ forecasting records and whether the accuracy of their prior earnings forecasts affects investor response to their subsequent forecasts. Within the context of a Bayesian model of investor learning, we find that the stock price response to management forecast news is increasing in prior forecast accuracy and also in the length of a firm’s forecasting record. Further, we document that investors are more responsive to extreme good and bad news forecasts when a firm has an established forecasting record. Overall, these results suggest that a firm’s prior forecasting behavior allows it to establish a forecasting reputation, and that market forces encourage accurate forecasting as firms benefit from having a reputation for forecasting accurately.

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.

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.

The information content of managerial insider trading: evidence from analyst forecasts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Omar Esqueda ◽  
Thanh Ngo ◽  
Daphne Wang
Keyword(s):  
Insider Trading ◽  
Fixed Effects ◽  
Information Dissemination ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Ordinary Least Squares ◽  
Content Type ◽  
Forecast Bias ◽  
Forecast Precision ◽  
Insider Trades

PurposeThis paper examines the effect of managerial insider trading on analyst forecast accuracy, dispersion and bias. Specifically, the authors test whether insider-trading information is positively associated with the precision of earnings forecasts. In addition, this relationship between Regulation Fair Disclosure (FD) and the Galleon insider trading case is examined.Design/methodology/approachPooled ordinary least squares (Pooled OLS) rregressions with year-fixed effects, firm-fixed effects, and firm-level clustered standard errors are used. Our proxies for forecast precision are regressed on alternative measures of insider trading activities and a vector of control variables.FindingsInsider-trading information is positively associated with the precision of earnings forecasts. Analysts provide better forecast accuracy, less forecast dispersion and lower forecast bias among firms with insider trading in the six months leading to the forecast issues. In addition, bullish (bearish) insider trades are associated with increased (decreased) forecast bias. Insider trading information complements analysts' independent opinion and increases the precision of their forecast.Practical implicationsRegulators may pursue rules that promote the rapid disclosure of managerial insider trades, particularly given the increasing availability of Internet tools. Securities regulators may attempt to increase transparency and enhance the reporting procedures of corporate insiders, for example, using Internet sources with direct release to the public to ensure more timely information dissemination.Originality/valueThe authors document a positive association between earnings forecast precision and managerial insider trading up to six months prior to the forecast issue. This relationship is stronger after the Securities and Exchange Commission (SEC) prohibited the selective disclosure of material nonpublic information through Regulation FD. In addition, the association between insider trading and forecast accuracy has weakened after the Galleon insider trading case.

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.

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