Effects of Biased Earnings Forecasts: Comparative Study of Earnings Forecasts Disclosures by US and Japanese Firms

Abstract

This chapter highlights the features of and issues in the disclosure of management earnings forecasts (MEFs) in Japan. In Japan, listed companies are mandated to publish MEFs, which can also be considered a function of self-discipline for the companies. Meanwhile, prior studies in the US and Japan have reported that earnings forecasts contain a variety of biases stemming from company characteristics and executive incentives. There is a risk for Japanese companies in using biased forecasts for self-discipline. For instance, since Japan does not mandate the election of outside directors, unlike the US or Europe, companies do not have functioning external monitoring. Thus, in this chapter, we examined the relationship between optimism in earnings forecasts and the presence of outside directors. Boards composed only of internal directors may prepare more optimistic forecasts, which may be mitigated by electing outside directors who bring a neutral, external perspective. The results of our inquiry elucidated that optimism in some portions of earnings forecasts may be reduced in companies with outside directors.