Management Earnings Forecasts Research Articles

Informational Endowment, Sophisticated Skepticism and Management Earnings Forecasts

While sophisticated skepticism promotes voluntary disclosure, various frictions serve to defeat it. One of the simplest frictions is rational investor uncertainty about management’s endowment of information (UEI). Sophisticated skepticism will increase as the likelihood that management is withholding value-relevant negative information increases, causing managers to voluntarily disclose increasingly unfavorable information in order to avoid the investors’ larger discounts. Based on previous research, we argue that the quality of management’s information improves with customer concentration. Accordingly, we find that the precision of, and investors’ reactions to, management forecasts increase for suppliers with more concentrated customer bases. Moreover, as the UEI model implies, firms with major customers are more likely to issue management forecasts preceding sales contractions (bad news) and the difference between the forecast disclosure frequency preceding sales expansions versus sales contractions decreases with both customer concentration and value relevance of the information possessed by management.

Can Institutional Investors Improve Voluntary Management Earnings Forecasts?

ABSTRACT We use data from 2010 to 2016 on listed companies in China to study the relationship between heterogeneous institutional investors and voluntary management earnings forecasts. We find that active institutional investors have a significantly negative influence on voluntary management earnings forecast only when the proportion of active institutional investors is in the upper 50 quartiles. Further studies show that, first, the inhibitory effect of active institutional investors on voluntary earnings forecasts mainly affects speculative active institutional investors and unstable active institutional investors. Second, boards that function better can significantly reduce the inhibitory effect of active institutional investors on the company‘s voluntary disclosures, and this inhibition occurs only with boards that do not have good governance. We also find that the overall shareholding of institutional investors significantly inhibits the company‘s voluntary management earnings forecasts, indicating that institutional investors should improve their supervision and governance role in voluntary management earnings forecasts at listed companies in China.

Is cost stickiness associated with management earnings forecasts?

Purpose The literature suggests that management discretion to adjust resources in response to changes in sales can create asymmetric cost behavior and management incentives to move stock prices can influence its decision to release management earnings forecasts (MEF). The purpose of this paper is to investigate the association between a firm’s degree of cost stickiness and its propensity to release MEF. The authors propose that both MEF and cost stickiness are influenced by management strategic choices and provide two possible explanations along with supportive evidence. First, when management is optimistic about future performance, it tends to increase both cost stickiness and is willing to disclose the optimistic expectations through MEF. Second, cost stickiness increases information asymmetry between management and investors, thus management tends to issue earnings forecast to mitigate the perceived information asymmetry. Design/methodology/approach The authors collect firm-level fundamental data from the COMPUSTAT database, and market data from the CRSP database during 2005 and 2016. The data used to measure variables related to institutional ownership and financial analysts are, respectively, obtained from the Thomson Reuters and the I/B/E/S databases. The quarterly MEF data are from two databases. The authors obtain the data before 2012 the from Thomson First Call’s Company Issued Guidance database and manually collect the data between 2012 and 2016 from the Bloomberg database for the largest 3,000 publicly traded US companies. The measurement of cost stickiness is based on the industry-level measurement developed by Anderson et al. (2003) and the firm-level measurements developed by Weiss (2010). The authors construct two measurements, management’s propensity to issue MEF and the frequency of MEF, to capture management’s voluntary disclosure strategy. Findings The analyses of a sample between year 2005 and 2016, indicate that the firm-level cost stickiness is positively associated with the firm’s propensity to issue MEF and the frequency of MEF. Moreover, the authors find that the level of cost stickiness is associated with more favorable earnings news forecasted by management. Additional tests suggest that both information asymmetry and managerial optimism may explain the relationship between cost stickiness and MEF. Finally, the authors find that the association between cost stickiness and MEF behaviors is more pronounced when the resource adjustment cost is high and when the firm efficiency is high. The results are robust after using alternative measurements of cost stickiness and MEF. Originality/value First, this paper attempts to build a bridge between managerial accounting and financial accounting by providing evidence of managerial incentives and discretions that affect both cost structure and earnings. The authors contribute to, and complement, prior studies that primarily disentangle the complicated accounting information system by focusing on either the internal information system or the external information system. Second, the paper complements prior studies that examine cost stickiness and its determinants of asymmetric cost behavior by providing additional evidence for the value-relevance of cost stickiness strategy and its link to MEF releases in mitigating information asymmetry. Third, the findings are also relevant to current debates among policymakers, academia and practitioners regarding modernization of mandatory and voluntary disclosures through discussing the managerial incentive behind the managerial disclosure strategies as reflected in MEF releases (SEC, 2013). Fourth, the authors provide evidence regarding management’s role in influencing cost asymmetry and MEF releases, which support the theoretical argument that management discretions affect the firms’ cost structure and MEF disclosures.

Unintended consequences of regulation FD: a natural experiment from China

ABSTRACT The aim of Regulation Fair Disclosure (Reg FD) is to prohibit selected disclosure and improve the information environment of capital markets. Using a natural experiment from China and applying a difference-in-differences design, we find that Reg FD constrains private communication between firms and analysts but has the unintended consequence of increasing earnings management, which deteriorates accounting information quality. Furthermore, the effect of Reg FD on earnings management is concentrated in firms without public management earnings forecasts (MFs), firms with strong incentives to meet or beat analysts’ targets, and firms with poor corporate governance. Overall, this study sheds light on the effect of Reg FD on the methods that managers use to meet analysts’ expectations and on how this effect varies with underlying firm characteristics.

How do industry peers influence individual firms’ voluntary disclosure strategies?

This paper investigates how industry peer firms influence the voluntary disclosure strategies of individual firms. Our 2SLS regressions on an empirical sample of management earnings forecasts show that the disclosure strategies of individual firms are significantly influenced by their peer firms’ disclosure behaviors. Specifically, the increased disclosure frequency and disclosure horizon of their industry peers encourage individual firms to increase their disclosure frequency and disclosure horizon. Moreover, firms with S&P credit ratings, higher profitability, larger size, and/or a higher market-to-book ratio tend to be more sensitive to their peer firms’ voluntary disclosure frequency, and react more strongly to peer firms that are of dissimilar size or profitability. Finally, we find that the leader–follower relation does not influence the effects of peer firms’ disclosure strategies. Additional tests suggest that signaling theory and litigation risk provide stronger explanations of why firms mimic their peers than herding theory and free rider theory. This paper contributes to the accounting literature by providing new evidence on the effects of voluntary disclosure. Our findings are also of relevance to industry practitioners, and they shed light on the recently proposed voluntary disclosure regulations.

The Effects of Income Smoothing and Managerial Ownership on Management Earnings Forecasts

[연구목적] 본 연구의 목적은 이익유연화가 영업이익예측에 미치는 긍정적인 영향이 경영자대주주지분율(≥5%)에 의해 강화되는지를 검증하는 것이다. 이러한 분석은 경영자가 실제영업이익이 그들이 공시한 영업이익예측치에 부합하도록 하기 위해 이익유연화를 활용하는 장기적 관점의 유인을 확인하게 할 것이다.BR [연구방법] 본 연구는 이익유연화 정도를 Leuz et al.(2003)와 Tucker and Zarowin(2006)이 사용한 방법에 의해 측정하였다. 경영자지분율과 경영자 영업이익예측자료는 전자공시시스템(DART)에 공시된 공정공시와 사업보고서로부터 수집하였다. 경영자지분율과 이익유연화 측정치가 경영자 영업이익예측치에 미치는 영향은 선형회귀모형(OLS: Ordinary least square)을 이용하여 분석하였다.BR [연구결과] 이익유연화 정도가 클수록 경영자 영업이익예측오차는 감소하고 예측정확성은 높아지는 것을 발견하였다. 또한 경영자가 5% 이상의 지분을 보유한 기업에서 경영자영업이익예측오차는 감소하고 정확성은 높아졌다. 더 나아가 이익유연화 정도와 경영자영업이익예측오차 및 정확성 간의 관련성은 경영자가 5% 이상 지분을 보유한 기업에서 강화되었다. 이러한 결과는 상대적으로 중대한 영향력을 행사할 수 있는 경영자가 이익유연화를 통해 그들이 공시한 영업이익예측치에 부합하도록 노력하는 것이다. 추가로 상기의 분석을 경영자지분율 3～7% 범위 내에서 각 기준에 따라 재분석하였고, 달라진 결과는 발견할 수 없었다.BR [연구의 시사점] 본 연구는 경영자가 이익유연화를 통해 그들이 공시한 이익예측치에 부합한다는 새로운 증거를 제시하였다. 따라서 투자자들은 기업의 미래이익을 예측할 때 기업의 이익유연화 정도도 고려해야 함을 시사하고 있다.

Management earnings forecasts and bank loan contracting

AbstractWe find that firms tend to issue management earnings forecasts and convey good news before bank loan initiation. Issuing firms enjoy more favorable contracting terms and attract more lenders. Management forecasts issuance within a nine‐month period prior to the loan activating quarter can lower the subsequent loan spread by 14.06 basis points. Moreover, firms with larger management forecast errors are charged harsher contracting terms and attract fewer lenders. Our study suggests that firms strategically issue management earnings forecasts before entering into debt contracts and lenders incorporate the information contained in management earnings forecasts into bank loan contracting.

The Consequences of Management Earnings Forecast Regulation: Stock Price Informativeness and Disclosure Externalities

We examine the consequences of a management earnings forecast regulation implemented in a staggered manner. The regulation substantially increases the directly affected firms’ frequency of management forecasts. Nevertheless, approximately 14% of the directly affected firms fail to comply with the regulation (noncompliant firms). The regulation helps increase the stock price informativeness of the directly affected firms that issue a forecast. The regulation also helps increase the stock price informativeness of the noncompliant firms (a spillover), but we find no evidence of a similar spillover for the firms that are not required to issue mandatory forecasts in the post-regulation period.

Major Government Customer and Management Earnings Forecasts

This paper examines whether customer base composition in the U.S., i.e., whether a firm’s major customers comprise of government entities or publicly traded companies, affects the properties of supplier’s management earnings forecasts. Using a sample of 1,168 management earnings forecasts from 1998 through 2014, we find that firms whose major customers are government entities (i.e., government suppliers) issue more precise and more accurate management earnings forecasts than firms whose major customers are public companies (i.e., corporate suppliers). Moreover, when managers disclose negative information to the market, earnings forecasts issued by government suppliers have greater price impact than those issued by corporate suppliers. Collectively, our empirical results suggest that having major government customers has a positive impact on the quality of management earnings forecasts.

The Impact of Analysts on the Slack in Management Earnings Forecasts

The Impact of Analysts on the Slack in Management Earnings Forecasts

How Inflation Affects the Management Earnings Forecasts

I use 2005-2017 Shenzhen and Shanghai’s A-share listed company’s quarterly earnings forecasts data as sample to perform multiple regression analysis. I find that when inflation rate rises, not only management’s possibility of making earnings forecasts but also the precision and accuracy of management forecasts declines, ceteris paribus. Furthermore, I also find that when inflation rate rises, the state-owned nature of enterprises will aggravate the decline in the precision and accuracy of listed companies’ earnings forecasts. In the unique context of semi-mandatory disclosure rules in China, if companies voluntarily disclose more performance-related information, it usually means that the managers are more capable, more confident. Therefore, this voluntary behavior can alleviate the decline in the precision and accuracy of the earnings forecast brought by inflation. Finally, I find that the precision and accuracy of the earnings forecasts will further decline for companies with higher debt ratios, indicating that liabilities may be one of the paths of inflation affecting voluntary information disclosure.

Litigation Risk and Voluntary Disclosure: Evidence from Legal Changes

ABSTRACT This paper documents that changes in litigation risk affect corporate voluntary disclosure practices. We make causal inferences by exploiting three legal events that generate exogenous variations in firms' litigation risk. Using a matching-based fixed-effect difference-in-differences design, we find that the treated firms tend to make fewer (more) management earnings forecasts relative to the control firms when they expect litigation risk to be lower (higher) following the legal event. The results are concentrated on the earnings forecasts conveying negative news and are robust to alternative specifications, samples, and outcome variables. JEL Classifications: D80; G14; K22; K41; M41.

The Impact of Impending Credit Rating Change on Management Earnings Forecast

This study investigates whether impending credit rating changes affect managers’ voluntary financial disclosure behaviors. I find that firms near a credit rating change do not opportunistically alter their financial disclosure practices to manipulate rating agencies’ perceptions of corporate credit risk. In particular, firms close to a credit rating change do not selectively release good news or withhold bad news on their earnings information. Nor do the firms likely issue an optimistically biased forecast or a more precise forecast for good news than for bad news. Overall, there is no evidence suggesting that credit ratings are manipulated via management earnings forecasts.

Country-level institutions and management earnings forecasts

Using a comprehensive sample hand-collected from the original texts of management earnings forecasts from 27 countries, we provide descriptive evidence on the country-level institutional determinants and economic consequences of forecast characteristics. Using principal component factors constructed from a number of country-level institutional variables, we find that forecast disaggregation, frequency, precision, and attribution vary significantly with the business and accounting environment of a country. We further document that better quality management forecasts are generally associated with stronger stock market reactions and higher investment efficiency. Together, our findings suggest that country-level institutions play a vital role in voluntary disclosure characteristics.

주가붕괴와 경영자 이익예측 공시 의사결정 및 특성

주가붕괴와 경영자 이익예측 공시 의사결정 및 특성

Managerial ability, forecasting quality, and open-market repurchase program completion

Prior research suggests that managers often fail to complete announced open market repurchase (OMR) plans due to uncertainty in the firm’s future cash flows. Although high-ability managers should manage cash flows more effectively to complete share reacquisitions, there is little evidence to support this idea. This paper investigates whether CEOs with superior ability to efficiently manage corporate resources are associated with higher OMR completion rates. Our main findings are that OMR program completion rates increase with managerial ability and that the association is further moderated by the quality of management earnings forecasts. Cross-sectional analyses indicate that the positive associations are more pronounced in firms with higher cash flow volatility and fewer rent extraction opportunities. Our results imply that the repurchase completion rate is potentially an observable signal of managers’ broader ability to forecast and adapt to uncertain cash flows during the repurchase period.

Impact of mood and gender on individual investors’ reactions to retractions and corrections of earnings forecasts

ABSTRACTWhilst individual investors’ reactions to earnings forecasts have been widely documented, the impact that retractions and/or corrections have on investors’ decisions has received little attention. Further, the role that either/both mood and gender of investors play has not been investigated within this context. This is especially important as failure by individual investors to adjust correctly to retractions/corrections of earnings may have adverse investment outcomes. Our study thus investigates whether mood and gender differences influence the way in which individual investors react to retractions and corrections of management earnings forecasts. In this paper, we show that individual investors do not adjust correctly to retractions and corrections of previously disclosed information. We also find that both mood and gender play a significant role in individual investors’ reactions to such announcements. Awareness of the differences in investors’ reactions to retractions and corrections of earnings according to their mood and/or gender can provide further insights on whether their investment decisions are rational and are hence consistent with traditional models of assumed rational investment behaviour.

An empirical investigation into the impact of Shari’ah-compliant status and Muslim directorship on the accuracy of IPO management earnings forecasts

PurposeIslam stresses on the practice of transparency and sufficient disclosure particularly when it concerns the ethical identity of Islamic institutions. This is to make sure that the activities conducted in business adhere to Shari’ah principles. The purpose of this paper is to examine the impact of Shari’ah-compliant status on the accuracy of initial public offering (IPO) earnings forecasts and to investigate the effect of the existence of Muslim directors on IPO companies’ board of directors on the accuracy of earnings forecasts.Design/methodology/approachThis study makes use of absolute forecast error as a proxy for earnings forecast accuracy. As obtained from the list of Shari’ah-compliant securities established by the Shari’ah Advisory Council of the Malaysian Securities Commission, the study sample comprised 190 Shari’ah-compliant and non-compliant IPOs. The collected data were analyzed through univariate analysis and ordinary least squares regression.FindingsThe initial findings show that during the study period, the earnings forecasts of Malaysian IPOs are accurate to some level, although such level is still unsatisfactory. The findings also showed that Shari’ah-compliant status and Muslim directorship do not positively affect the accuracy of IPO earnings forecasts.Practical implicationsThe findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly those desirous of investing in Islamic capital market.Originality/valueThe present study provides a new and far-reaching contribution into the debate about the earnings forecasts disclosure in the context of Islamic ethical perspective. In addition, this study is considered as the first study to extend IPO literature by examining the impact of Shari’ah-compliant status and Muslim directorship on the accuracy of management earnings forecasts disclosed in the IPO prospectus.

Management earnings forecasts, managerial incentives, and risk-taking

Management earnings forecasts, managerial incentives, and risk-taking

CEO and Outside Director Equity Compensation: Substitutes or Complements for Management Earnings Forecasts?

This study examines how the equity compensation of chief executive officers (CEO) and that of outside directors affect management earnings forecasts (MFs) and the relationship between these two positions in terms of compensation. Our evidence reveals that CEO (director) equity compensation is positively associated with MF likelihood, frequency, and accuracy when director (CEO) equity compensation is not high. However, an increase in director (CEO) equity compensation is not effective in improving disclosure quality when the level of CEO (director) equity compensation is already high. These results suggest that the two incentive mechanisms act as substitutes when both are intensively used in the context of MF disclosure.