Can Managers be Wrong and Still be Right? An Examination of the Future Realization of Current Management Forecast Errors

2020 ◽  
Author(s):  
Michael D. Kimbrough ◽  
Hanna Lee ◽  
Yue Zheng
Keyword(s):  
Forecast Errors ◽  
Managerial Ability ◽  
Current Management ◽  
Forecast Period ◽  
Earnings Announcement ◽  
Forecast Revisions ◽  
Future Earnings ◽  
Management Forecast ◽  
Incremental Information ◽  
The Future

We examine whether management forecast errors (MFEs), which are traditionally interpreted as backward-looking indicators of how well forecasts preempted earnings announcements, also operate as forward-looking measures that aid with predicting future earnings. This possibility arises if an MFE represents unrealized revenues or expenses a manager originally anticipated to occur in the forecast period but that ultimately occur in subsequent periods. Consistent with this possibility, we document that optimistic MFEs contain incremental information over current earnings for predicting future earnings realizations. This finding does not extend to pessimistic MFEs, consistent with such errors reflecting expectations management. The predictive information in optimistic MFEs is negatively related to managers' incentives to intentionally bias the forecast and is positively related to managerial ability. Analysts' post-earnings announcement forecasts for the subsequent period overestimate the future realization of MFEs but such overestimation is less severe when managers issue timely post-earnings announcement forecast revisions for subsequent periods.

The Contribution of Fundamental Analysis after a Currency Devaluation

2003 ◽  
Vol 78 (3) ◽  
pp. 875-902 ◽  
Author(s):  
Edward P. Swanson ◽  
Lynn Rees ◽  
Luis Felipe Juarez-Valdes
Keyword(s):  
Value Relevance ◽  
Explanatory Power ◽  
Financial Statement ◽  
Forecast Errors ◽  
Fundamental Analysis ◽  
Gross Margin ◽  
Currency Devaluation ◽  
Forecast Revisions ◽  
Future Earnings ◽  
Administrative Expenses

For a sample of companies traded on the Mexican Bolsa, fundamental analysis is used to investigate the value of financial statement information to investors after the December 1994 currency devaluation. Associations with contemporary returns show that earnings in the year of the devaluation lose value relevance, but fundamental signals, which incorporate the more detailed accounting information provided in financial statements, retain considerable explanatory power (R2 is 25 percent). After the devaluation, fundamental signals based on changes in selling and administrative expenses and changes in gross margin are significant in several analyses, including predictions of future earnings, analysts' forecast revisions, and analysts' forecast errors. Because analysts underutilize those signals, an opportunity exists after the devaluation for a substantial profit from a zero investment trading strategy.

Management Forecast Accuracy and CEO Turnover

2012 ◽  
Vol 87 (6) ◽  
pp. 2095-2122 ◽  
Author(s):  
Sam (Sunghan) Lee ◽  
Steven R. Matsunaga ◽  
Chul W. Park
Keyword(s):  
Firm Performance ◽  
Boards Of Directors ◽  
Forecast Accuracy ◽  
Ceo Turnover ◽  
Forecast Errors ◽  
Positive Relation ◽  
Managerial Ability ◽  
Management Forecast ◽  
Future Events ◽  
The Absolute

ABSTRACT We investigate whether management forecast accuracy provides a signal regarding CEOs' ability to anticipate and respond to future events by examining the relation between management forecast errors and CEO turnover. We find that the probability of CEO turnover is positively related to the magnitude of absolute forecast errors when firm performance is poor and that this positive relation holds for both positive and negative forecast errors. In addition, we find that the positive relation between CEO turnover and the absolute forecast errors is concentrated in the sample of less entrenched CEOs. Our findings indicate that boards of directors use management forecast accuracy as a signal of CEOs' managerial ability and that managers bear a cost for issuing inaccurate forecasts.

Mandatory management forecasts, forecast revisions, and abnormal accruals

2016 ◽  
Vol 24 (3) ◽  
pp. 295-312 ◽  
Author(s):  
Akihiro Yamada
Keyword(s):  
Forecast Errors ◽  
Economic Costs ◽  
Working Capital ◽  
Content Type ◽  
Forecast Revisions ◽  
Economic Information ◽  
Management Forecast ◽  
Abnormal Accruals ◽  
Earnings Forecasting ◽  
The Relationship

Purpose Current systems of regulation in Japan require that listed firms disclose earnings forecasts for the coming fiscal year. The Japanese Business Federation is contesting this requirement, requesting that mandatory forecast disclosures be abolished. The purpose of this paper is to investigate the relationships between accruals and initial management earnings forecast errors (MFERR), and between accruals and forecast revisions. Further, the study offers a preliminary discussion of the economic costs of mandatory earnings forecasting, with a specific focus on firms operating under conditions of uncertainty or facing difficulty in analyzing economic information. Design/methodology/approach To investigate the relationship between accruals and management forecast errors (revisions), multiple regression models were designed using data covering the period between 2003 and 2013, pertaining to listed Japanese firms. A model developed by Dechow and Dichev (2002) was applied to estimate normal and abnormal accruals. Findings The author found a positive relationship between accruals and initial MFERR, and a negative relationship between accruals and forecast revisions. Further, the relationship between accruals and management forecast errors (revisions) is more pronounced among firms operating in uncertain business environments or facing difficulty in analyzing economic information. Originality/value The study provides an important analysis of abnormal working capital accruals in relation to both initial MFERR and forecast revisions. While total accruals or working capital accruals have been documented in prior studies in this regard, abnormal accruals have not. Furthermore, this study offers a preliminary discussion of the economic costs associated with earnings forecasting under conditions of mandatory disclosure. The economic impact of forecasting has not previously been addressed under either mandatory or voluntary conditions.

Research and Development Expense and Analyst Forecast Errors: An Underestimation of Sales or Overestimation of Expenses?

2018 ◽  
Vol 34 (4) ◽  
pp. 667-684
Author(s):  
Mary S. Hill ◽  
George W. Ruch ◽  
Gary K. Taylor
Keyword(s):  
Research And Development ◽  
Financial Statements ◽  
Analyst Forecast ◽  
Forecast Errors ◽  
Fixed Costs ◽  
Sales Growth ◽  
Future Earnings ◽  
The Future

We test whether analysts adequately incorporate the implications of research and development (R&D) activities into their forecasts by observing the relation between R&D expense and future forecast errors for earnings, sales, and expenses. We find that analysts systematically underestimate the future earnings implications of R&D, and that this underestimation of earnings is attributable to an overestimation of future expenses rather than an underestimation of future sales. We further find that our results are driven by firms with high fixed costs and high sales growth, which suggests that analysts, on average, assume that costs vary proportionally with sales in high R&D firms perhaps due to the difficulties in separating fixed and variable costs in most financial statements.

Information Technology Capability, Management Forecast Accuracy, and Analyst Forecast Revisions

2018 ◽  
Vol 32 (3) ◽  
pp. 49-70 ◽  
Author(s):  
Feiqi Huang ◽  
He Li ◽  
Tawei Wang
Keyword(s):  
Forecast Accuracy ◽  
Analyst Forecast ◽  
Management Forecasts ◽  
Forecast Revisions ◽  
It Capability ◽  
Management Forecast ◽  
Prior Literature ◽  
Technology Capability ◽  
Information Technology Capability ◽  
The Relationship

SYNOPSISPrior literature has firmly established the relationship between IT capability and firm performance. In this paper, we extend the research in this field and investigate (1) whether IT capability contributes to management forecast accuracy, and (2) whether IT capability improves the informativeness of management forecasts and enhances the extent to which analysts incorporate management forecasts in their revisions. Using firms listed on InformationWeek 500 as our high IT capability group, we empirically demonstrate that firms with high IT capability are able to increase management forecast accuracy, and that analysts incorporate more information from management forecasts in their revisions if the firm has high IT capability.

scholarly journals Equity Incentives and Earnings Management

2005 ◽  
Vol 80 (2) ◽  
pp. 441-476 ◽  
Author(s):  
Qiang Cheng ◽  
Terry D. Warfield
Keyword(s):  
Earnings Management ◽  
Stock Ownership ◽  
Stock Performance ◽  
Future Earnings ◽  
Equity Incentives ◽  
Time Period ◽  
Earnings Surprises ◽  
The Future

This paper examines the link between managers' equity incentives—arising from stock-based compensation and stock ownership—and earnings management. We hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Using stock-based compensation and stock ownership data over the 1993–2000 time period, we document that managers with high equity incentives sell more shares in subsequent periods. As expected, we find that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts. We also find that managers with consistently high equity incentives are less likely to report large positive earnings surprises. This finding is consistent with the wealth of these managers being more sensitive to future stock performance, which leads to increased reserving of current earnings to avoid future earnings disappointments. Collectively, our results indicate that equity incentives lead to incentives for earnings management.

scholarly journals Information Content of Earnings Managements: Implications on Growth and Value Companies

2016 ◽  
Vol 2 (1) ◽  
pp. 47-56
Author(s):  
Windu Mulyasari ◽  
Slamet Sugiri ◽  
Heyvon Herdhayinta
Keyword(s):  
Earnings Management ◽  
Information Content ◽  
Market Price ◽  
Accounting Information ◽  
Future Earnings ◽  
Cycle Growth ◽  
Incremental Information ◽  
Growth Firms ◽  
Management Behaviors

Objective: The purpose of this study is to investigate the pattern of earnings management on growth and value companies in Indonesia. This study predicts that earnings management has information contents. Therefore, earnings management tends to degrade the quality of earnings, then affect the future profitability. This study analyzes the effect of earnings management information content to the company's future profitability. This study provides an understanding about accounting information at certain market price levels for growth and value companies. Findings: Findings of this study indicate the differences between earnings management influence on growth and value companies. The results also support the differences of relative incremental information content of earnings management on growth and value companies. The growth firms tend to do earnings management and have higher profitability compared to the value firms. The implication is that the incremental information content of earnings management on growth firms is lower than those of the value firms to predict future profitability.   Implication: The contribution of this research is to provide an in-depth review on earnings management study associated with company life cycle (growth and value), as well as  to give additional understanding about the existence of incremental information content of earnings management. Thus, firms show different earnings management behaviors and ultimately those behaviors affect the quality of profit to predict future earnings

Farming duplex soils: a farmer's perspective

1992 ◽  
Vol 32 (7) ◽  
pp. 811 ◽  
Author(s):  
I Edwards
Keyword(s):  
Soil Types ◽  
Current Management ◽  
Research Areas ◽  
The Future

The methods we have employed to tackle the problems of farming duplex soils are being carried out by many farmers statewide to varying degrees. These methods also apply to soils other than duplex ones. In this paper I will give a brief description of the area that we farm and its soil types, and outline the problems with farming duplex soils, our solutions to them, and how we have implemented the solutions.To illustrate the differences that management and rotations can achieve in increasing yields, I will describe our previous management compared with our current management and outline what we will be attempting in the future to increase yields further. Finally, I will give some of my views on sustainability and neglected research areas.

Analisis Ratio Keuangan terhadap Perubahan Kinerja pada Perusahaan di Industri Food and Baverages yang Terdaftar pada BEJ

2005 ◽  
Vol 1 (2) ◽  
pp. 104
Author(s):  
DIAN MERIEWATY ◽  
ASTUTI YULI SEIYANI
Keyword(s):  
Stock Exchange ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Ratios ◽  
Future Earnings ◽  
Financial Condition ◽  
Total Capital ◽  
Future Earning ◽  
The Future ◽  
And Performance

Financial statements users need financial informotion of companies to analyze their financial condition and performance. Finacial rotios are useful rneasares for explaning the future earning changes. The study focuses on the usefulness of ftnancial ratios in explaning future eamings.The objective of the study is to empirically examine whether financial statement based tinancial ratios hove ability for explaning future earnings. Data in this study were in food and beverages firms listed on the Jaknrta Stock Exchange. Regression analysis were used in testing the ability financial ratios for explaning changes. The multicollinearity test shows that there is no assosiation between independent variables, indicating multieollinearity is not a seriaus problem. The heteroscedasticity test shows that voriances of disturbances are constant for all observation in independentt variables. Therefore heteroscedasticity is not a problem. The empiricolly result showed that, financial ratios in/luences the futureearnings changes for earning after tax are total debt to total capital assets, total assets turnover, and return on investment. Among those sevent financial ratios that are significant influences the future earnings changes for operating prortt is current ratio.Keywords : Financial Ratios, Performance changes of firms, significantlyinfluence.

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