The Effect of Organizational Complexity on Earnings Forecasting Behavior

Abstract

This paper examines whether organizational complexity affects management’s communication with external market participants. We specifically examine three aspects of organizational complexity – business, geographical, and cost structure complexity. We find evidence consistent with geographical complexity reducing the quantity and quality of management’s communication with external market participants. Specifically, we find that management is less likely to revise its initial forecasts and more likely to bundle its earnings forecasts with earnings announcements. We also find that management issues more pessimistic, less precise, and less accurate earnings forecasts when geographical complexity increases. Cost structure complexity also appears to reduce the quantity and quality of management’s communication with external market participants. Our results suggest that cost structure complexity increases the likelihood of management bundling earnings forecasts and issuing more pessimistic earnings forecasts. This paper adds to the accounting and management literature by further examining how the structural organization of the firm affects the costs and benefits managers face when communicating financial information to external market participants. We also provide an explanation for why managers miss their own forecasts as well as why managers issue pessimistic forecasts.