CEO age and analysts forecast properties

Abstract

PurposeThe purpose of this paper is to assess whether there is an association between CEO age and analysts forecast properties (particularly forecast accuracy and bias/optimism). CEOs, having the central role in managing firms, can significantly influence the financial and non-financial decisions in an organisation. Furthermore, having been identified as key culprits in past major accounting scandals, it is also important to identify the CEO characteristics that affect financial reporting decisions.Design/methodology/approachThis study adopts the upper echelon theory on the relationship between CEO age and analysts forecast properties. The authors use a sample of 2,730 Australian firm-year observations for the period 2004–2013 drawn from IBES, Connect 4 and SIRCA databases.FindingsThe authors find that analyst forecast accuracy increases and bias (optimism) reduces with the CEO age. The authors conclude that earnings and related information provided to analysts improves with the CEO age, which increases the forecast accuracy and reduces bias (optimism). Additional results suggest that the positive (negative) effect of CEO age on forecast accuracy (bias) remains until the CEOs reach the age of their retirement age (65 years). The results remain consistent with a number of sensitivity tests and provide implication for stakeholders such as firms, analysts, auditors, financial statements users and regulators.Practical implicationsThe authors demonstrate that the relationship between CEO age and analyst forecast properties is not linear but is, in fact, curvilinear substantiating concerns that CEOs that are much younger or much older do not help increase the quality of the information environment. Consequently, firms hiring CEOs in the right age bracket also benefit by having higher-quality information environment leading possibly to reduce costs such as those relating to debt and/or equity ultimately increasing firm value.Originality/valueEmpirical studies on the association between CEO age and analysts earnings properties in Australia are scarce and this paper contributes to the determinants of the analysts forecast accuracy and bias (optimism) and the CEO age literature.