Management Earnings Forecasts Research Articles

Ownership structure and disclosure quality: Evidence from management forecasts revisions in Japan

We investigate the relationship between ownership structure and quality of disclosure in the case of Japanese firms. Our measure of disclosure quality is denoted by the attitude of firms toward voluntary revisions of management earnings forecasts, which are effectively mandatory in Japan. The results show that firms with high foreign and domestic institutional ownership are more likely to provide management forecasts revisions in a voluntary and timely manner. In contrast, firms with high bank ownership have a greater propensity to withhold material changes in management forecast estimates until the very last moment when they are legally compelled to reveal that information. These findings suggest that active investors are able to induce firms to adopt better disclosure practices, while investors with close business ties and access to firms’ private information appear to restrict the flow of information to other investors.

Geographic Peer Effects in Management Earnings Forecasts

We find that the likelihood that a firm voluntarily provides an earnings forecast is sensitive to the extent to which other firms in the same geographic area provide earnings forecasts. This geographic peer effect in forecasting is stronger for firms with greater exposure to local institutional investors, and when firms do forecast, liquidity improves more when a larger fraction of their geographic peers forecast. Further, we use instrumental variable techniques to help alleviate the concern that these geographic peer effects are driven by omitted local economic factors that can lead firms to make similar disclosure decisions. Overall, our findings suggest that geographic peer effects in disclosure choices arise in part due to firms responding to capital market incentives created by local investors.

Management Earnings Forecasts and Target Ratcheting: From the Perspective of Abnormal Accruals

This paper analyzes earnings management for the current year and the revision of management earnings forecasts (MEF) for the next year. It reports that the ratchet effect can be observed at the managerial level. Principals, who do not hold as much comprehensive information on productivity as agents do, determine the future budget based on past performance. This tendency of target ratcheting may cause a ratchet effect, wherein agents reduce their effort to prevent future budgets from being revised upward. First, in the relationship with shareholder as the principal and manager as the agent, evidence that target ratcheting can be observed in MEF is presented. Next, the study assumes two managers with different unmanaged earnings forecasts for the next year in order to analyze abnormal accruals manipulated by them in the current year, and the MEF revision for the next year—one includes management who attains the current year’s MEF, but predicts earnings decline for the next year (TRANSIT), while the other attains the current year’s MEF, but predicts earnings increase the next year (PERSIS). Consistent with the ratchet effect, both TRANSIT and PERSIS reduce accruals in the current period. Finally, the relationship between abnormal accruals of the current year and the revision of MEF for the next year are analyzed. The results show that the ratchet effect is only observed in TRANSIT. These results suggest that the managerial difficulty of the consecutive earnigs increases is a necessary condition for the ratchet effect to be established.

The role of the gender diversity of audit committees in modelling the quality of management earnings forecasts of initial public offers in Malaysia

PurposePresently, one of the major governance issues faced by management and shareholders of organizations is the gender composition of the boards of directors and audit committees. This study aims to examine the impact of gender diversity in audit committees on the accuracy of management earnings forecasts disclosure in initial public offering (IPO) prospectuses.Design/methodology/approachThe study sample comprises 190 Malaysian companies issuing IPOs that transformed into public companies during the period 2002-2012. Earnings forecasts accuracy (quality) is proxied by absolute forecast error and the study model is developed based on the frameworks of the signalling theory, the agency theory and the resource-dependence theory.FindingsThe study proposes that female directors introduce a set of specific features in the boardroom that serve to improve investor protection and efficient monitoring of management. However, findings reveal an insignificantly positive relationship between gender diversity in audit committees and absolute forecast error, which shows that more female directors in audit committees could translate into more errors and less accuracy in earnings forecasts.Practical implicationsConsidering the recent regulatory developments that encourage the number of women on the board of directors, the findings obtained have significant implications for policymakers. The study findings can also be invaluable to investors, investment analysts, market players and researchers.Originality/valueThe composition of the board of directors and audit committees in terms of gender plays a significant role in the promotion of effective corporate governance practices. This study is one of the pioneering studies that examines the advantages of gender diversity in the board of directors. It is also the first study to extend IPO literature by investigating the role of gender diversity in audit committees in the enhancement of accurate management earnings forecasts included in the IPO prospectuses.

Determinants of Management Earnings Forecasts: The Case of Global Shipping IPOs

AbstractFirms that go public on global stock markets are not obliged to disclose earnings forecasts in their prospectuses. We use this fact to examine the shipping industry, where most firms voluntarily issue earnings forecasts during the IPO process, thus providing unique, international‐level evidence. We find overall pessimistic forecasts of ship owners, primarily because of the industry's uncertain and volatile environment. High ship owner participation after going public is associated with less accurate earnings forecasts. Our results further indicate that financial leverage, a listing in an emerging stock market, and global market conditions are other main factors responsible for inaccurate earnings forecasts.

Risk-based forecasting and planning and management earnings forecasts

This study examines the association between a firm’s internal information environment and the accuracy of its externally disclosed management earnings forecasts. Internally, firms use forecasts to plan for uncertain futures. The risk management literature argues that integrating risk-related information into forecasts and plans can improve a firm’s ability to forecast financial outcomes. We investigate whether this internal information manifests itself in the accuracy of external earnings guidance. Using detailed survey data and publicly disclosed management earnings forecasts from a sample of publicly traded U.S. companies, we find that more sophisticated risk-based forecasting and planning processes are associated with smaller earnings forecast errors and narrower forecast widths. These associations hold across a variety of different planning horizons (ranging from annual budgeting to long-term strategic planning), providing empirical support for the theoretical link between internal information quality and the quality of external disclosures.

Management Earnings Forecasts as a Performance Target in Executive Compensation Contracts

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.

The effect of disclosure regulation on the bias and accuracy of management earnings forecasts in Malaysian IPO prospectuses

PurposeThis paper aims to examine the impact of disclosure regulation on the levels of bias and accuracy in management earnings forecasts disclosed in the prospectuses of Malaysian initial public offering (IPO). Specifically, the authors investigated the two environments of regulation (mandatory versus voluntary) to draw some conclusions regarding the benefits of regulating disclosure of management earnings forecasts.Design/methodology/approachA sample of 111 Malaysian IPOs listing on the Main Market of Bursa Malaysia from January 1, 2004 to February 29, 2012 was used. The paper uses both univariate and multivariate statistical analyses on this sample of IPOs.FindingsThe empirical results of these multivariate regressions indicated that disclosure regulation has positive and significant impact on the bias and accuracy of management earnings forecasts disclosed in IPO prospectus. In general, the study results suggest that using disclosure regulation to improve the quality of IPO earnings forecasts can be, to some extent, an effective strategy.Practical implicationsThe findings of this study have important implications for regulators and investors. The findings can provide them some relevant insights on the improvements to the earnings forecasts accuracy and trends of the forecast (optimistic or pessimistic) after the change from mandatory to voluntary disclosure. Thus, the authorities may learn whether this change is an effective policy or whether the regime of mandatory disclosure was better for IPO companies and should be reversed.Originality/valueThis study is regarded as the first attempt to investigate the impact of reforms in disclosure regulation on the quality of management earnings forecasts of IPO prospectuses in a developing nation such as Malaysia. In spite of this, the paper focuses on a single country, and it contributes significant insights to the debate about the credibility of IPO management earnings forecasts.

Political uncertainty and voluntary management earnings forecasts

This paper examines the effect of political uncertainty on voluntary management earnings forecasts. Using Chinese A-share listed companies from 2006 to 2013, we find that managers are more likely to issue earnings forecasts and increase earnings forecasts precision after the turnover of Provincial Party Secretary. The effect is more pronounced for Non-State Owned Enterprises, when the new official comes from other provinces, or for firms with more analyst coverage. Further analysis shows that the market reaction to earnings forecasts is stronger when political uncertainty is high. Our study sheds light on the real effects of political uncertainty and contributes to the understanding of voluntary management earnings forecast behaviours.

The Effects of Refinancing Risk on Management Earnings Forecasts

The Effects of Refinancing Risk on Management Earnings Forecasts

Consequences of CEO Overconfidence

We test the impact of CEO overconfidence on the cost of debt and the impact of SOX on overconfidence via CEO selection. Our CEO overconfidence measure is based on the degree of optimism in management earnings forecasts, and the measure for the cost of debt is bond yield spreads. Our evidence supports that the market discounts CEO overconfidence by increasing the cost of borrowing. Moreover, we find that the financial market also incorporates past CEO overconfidence into bond pricing. We document that the board prefers to appoint a more rational CEO over an overconfident CEO. Our findings are consistent with Banerjee et al.’s (2015) argument that an independent board mitigates the costs of CEO overconfidence in terms of investment and risk exposure.

Do Board Secretaries Influence Management Earnings Forecasts?

The role of board secretaries is a unique institutional feature in China. Individuals in this senior executive role are responsible for coordinating information disclosure. We study the impact of board secretaries on management earnings forecasts and find that their legal expertise, accounting expertise and foreign experience help improve management earnings forecast quality. The quality of forecasts, as indicated by their occurrence, frequency, precision and accuracy, is also positively associated with the role duality (e.g. board director, CFO or other senior executive role) and equity holdings of board secretaries and negatively associated with their political connection. The quality of forecasts is found to increase the compensation of board secretaries. Finally, we show that the equity holding of board secretaries reduces litigation risks and increases corporate philanthropic giving.

The Effect of Disaggregated Management Earnings Forecast on Analysts’ Earnings Forecasts’ Bias and Errors

The Effect of Disaggregated Management Earnings Forecast on Analysts’ Earnings Forecasts’ Bias and Errors

The Effect of Management Earnings Forecasts on Future Earnings Quality

The Effect of Management Earnings Forecasts on Future Earnings Quality

Earnings Announcement Disclosures and Changes in Analysts' Information

AbstractThis study examines how financial disclosures with earnings announcements affect sell‐side analysts' information about future earnings, focusing on disclosures of financial statements and management earnings forecasts. We find that disclosures of balance sheets and segment data are associated with an increase in the degree to which analysts' forecasts of upcoming quarterly earnings are based on private information. Further analyses show that balance sheet disclosures are associated with an increase in the precision of both analysts' common and private information, segment disclosures are associated with an increase in analysts' private information, and management earnings forecast disclosures are associated with an increase in analysts' common information. These results are consistent with analysts processing balance sheet and segment disclosures into new private information regarding near‐term earnings. Additional analysis of conference calls shows that balance sheet, segment, and management earnings forecast disclosures are all associated with more discussion related to these items in the questions‐and‐answers section of conference calls, consistent with analysts playing an information interpretation role with respect to these disclosures.

Can Voluntary Management Earnings Forecasts Improve Value Relevance of Earnings in China?

Managers’ voluntary disclosure of private information in advance may confirm subsequent financial reports and make them more trustworthy. However, Lennox and Park (2006) document past management earnings forecasts (MEFs) are NOT positively associated with a firm’s earnings response coefficient in USA. This paper examines whether MEFs can improve value relevance of earnings numbers in China, as a different information market environment. Based on a sample of Chinese listed firms in 2005-2012, we find that firms disclosing voluntary MEFs show significantly higher value relevance of earnings information in annual reports. The confirmation effects of voluntary MEFs also apply to normal/abnormal accruals and cash flows from operations. We do NOT find similar improvements by voluntary MEFs in value relevance of balance sheet items for most regressions. Among forecast characteristics, we find that more specific forecasts can significantly improve value relevance of earnings, indicating that the markets particularly care for the forecast specificity in China. Our results are robust to different research designs and additional tests concerning earnings news types, corporate governance effects, endogeneity considerations and sample adjustments. The findings contribute to literatures by showing how a different information market environment highlights the effects of voluntary MEFs.

The influence of family firm dynamics on voluntary disclosures

We examine the voluntary disclosure practices of family firms. Family firms have longer investment horizons and lower agency conflicts between owners and managers. However, they also exhibit higher agency conflicts between controlling and non-controlling shareholders, and greater concerns about their own reputations. We therefore hypothesize that the previously documented association between stock-based incentives and voluntary disclosures is dampened for family firms. In comparison to non-family firms, we find that family firms are less likely to provide management earnings forecasts when their CEO's wealth (linked to the firm) is higher. We note this influence only in larger firms, which is consistent with the finding that larger firms have a significantly higher number of stock-based incentives than smaller firms. Additionally, the main result continues to hold when a family member serves as CEO or on the board of directors. We contribute to the literature by extending the research on stock-based incentives and voluntary disclosure, linking this research to family firms, and providing insight on the conflicting results found in prior family firm research.

Risk-Based Forecasting and Planning and Management Earnings Forecasts

This study examines the association between a firm’s internal information environment and the accuracy of its externally-disclosed management earnings forecasts. Internally, firms use forecasts to plan for uncertain futures. The risk management literature argues that integrating risk-related information into forecasts and plans can improve a firm’s ability to forecast future financial outcomes. We investigate whether this internal information manifests itself in the accuracy of external earnings guidance. Using detailed survey data and publicly-disclosed management earnings forecasts from a sample of publicly-traded U.S. companies, we find that more sophisticated risk-based forecasting and planning processes are associated with smaller earnings forecast errors and narrower forecast widths. These associations hold across a variety of different planning horizons (ranging from annual budgeting to long-term strategic planning), providing empirical support for the theoretical link between internal information quality and the quality of external disclosures.

The Effect Of IFRS Adoption On Likelihood Of Management Earnings Forecasts: Evidence In Korea

Korean listed companies adopted International financial reporting standards (IFRS) in 2011 mandatorily. The IFRS adoption modifies corporate financial reporting structure and further it can affect managers’ incentive for disclosing their earnings forecasts. We investigate the association between IFRS adoption and likelihood of management earnings forecasts. From the empirical results, we find that mandatory IFRS adopted companies are less likely to issue their earnings forecasts after IFRS adoption. It implies that investors’ belief about management earnings forecasts as useful information is weakened after IFRS adoption compare to pre-IFRS adoption period. Therefore, managers’ incentive for providing earnings forecasts decreases. This study will contribute to academics and disclosure-related practitioners by reporting how IFRS adoption makes an influence to managers’ incentive of management earnings forecasts issuance. We also believe that the empirical evidence may shed some lights on the understanding of the spillover effect of IFRS adoption to management earnings forecasts.

When Dye Meets Verrecchia: A Structural Estimation of Disclosure Theory

We develop structural estimators for disclosure costs (or benefits), and empirical bounds for the probability of information endowment in a generalized disclosure model nesting Verrecchia (1983) and Dye (1985). The baseline estimator of disclosure costs is a closed-form function of (i) the minimum disclosure surprise, (ii) the average disclosure surprise, and (iii) the frequency of disclosure. Furthermore, it can be computed without solving for either the entire equilibrium of the game or knowledge of distributions. We derive the asymptotic properties of the estimator and illustrate, in simulations, its properties in small samples. A new empirical test is derived which can test for samples incompatible with the theory. The probability of information endowment is not point-identified but can be bounded from above in the case of disclosure benefits. Additionally, adapting an argument from conditional choice probabilities, the estimation extends to a multi-period setting with time-varying frictions as a function of observable state variables. As an application, we conduct the estimation using quarterly management earnings forecasts, characterize the magnitude of the disclosure costs, describe covariates associated with disclosure costs and perform various tests to detect the fraction of firms’ behavior inconsistent with the theory or whose probability of information endowment is significantly less than one. The framework offers a simple theory-based approach to estimating voluntary disclosure models.