Management Forecast Errors Research Articles

Functional Background Diversity of Top Management Team and Managerial Forecasting Capability

ABSTRACT This study examines whether top management team (TMT) functional background diversity affects managerial forecasting capability. We find that TMTs with more diverse functional backgrounds issue more accurate earnings forecasts. Additional tests reveal that the negative association between TMT functional background diversity and management forecast errors becomes weaker when TMTs work together for a long time, when subgroups are more likely to develop within the team, when CEOs are more powerful, and when team size is larger. By contrast, the reduction in management forecast errors is more significant for functionally diverse TMTs when forecasting difficulty is higher. These findings suggest that TMT functional background diversity plays an important role in managerial forecasting capability. Data Availability: Data are available from the sources cited in the text. JEL Classifications: M14; M41.

The Impact of Upstreamness on Investment Quality in Multitier Supply Chains

ABSTRACT In this study, we explore the negative impact of upstreamness on suppliers’ investment quality and management earnings’ forecast accuracy and investigate whether a shared auditor engaged by both a supplier and its major customers could mitigate these effects. Using a comprehensive dataset of multitier supply chains, we find that suppliers located further upstream tend to have lower investment efficiency and exhibit less accurate management earnings forecasts. However, our results also show that the presence of a shared auditor in the supplier-customer pair could alleviate these adverse impacts by enhancing the quality of information in the supply chain. Our findings shed light on the implications of upstreamness in the supply chain, such as reduced investment efficiency and increased management forecast errors and suggest a role for information quality in mitigating these consequences. Data Availability: All data are available from public sources mentioned in the text.

Pressures From Media Coverage: Evidence on Managing Earnings Toward Earnings Guidance

This study investigates whether media attention pressures managers to live up to market expectations. Using a comprehensive dataset of media coverage on U.S. public firms, we find that media coverage pressures, rather than deters, managers to manipulate reported earnings to reduce management forecast errors, and the effect is mainly driven by the media’s information dissemination role rather than its information creation role. In addition, we show that the association is stronger when firms face higher litigation risk, when managers have higher reputational concerns, and when corporate governance is weaker. Our findings provide new insights into a potentially negative effect of media coverage in the capital markets.

The impact of IFRS adoption on IPOs management earnings forecasts in Australia

This study investigates the accuracy of management earnings forecasts under International Financial Reporting Standards (IFRS) in the context of an initial public offering (IPO). We observe a decline in management forecast errors (FEs) in Australia following the mandatory implementation of IFRS in 2005. Further evidence suggests that IPO management earnings forecasts become more conservative after IFRS was required. We argue that IFRS enables investors to better evaluate IPO firms’ performance and demand higher returns from firms that report inflated and inaccurate earnings forecasts. We also show that over-optimistic earnings forecasts and larger forecasting errors result in greater underpricing under the IFRS regime. Overall, this study suggests that IFRS, as a set of high-quality accounting standards, improves corporate disclosure quality and the information environment.

Effective board monitoring over earnings reports and forecasts: Evidence from CFO outside director appointments

Prior evidence that firms adjust their board structure following accounting restatements suggests that firms expect the board to effectively monitor the firm’s financial accounting system. However, little is known about signals firms use to identify monitoring weaknesses or the types of individuals firms appoint to improve the quality of monitoring. We expand on Ghannam, Bujega, Matolcsy, and Spiropolous (2019)’s evidence that firms appoint directors with accounting experience after financial fraud by investigating whether firms that file restatements or issue highly inaccurate earnings forecasts appoint individuals with CFO experience (i.e., a subset of accounting experts) to their audit committee. We find that firms are more likely to appoint an outside director with CFO experience to the audit committee when they have recently restated earnings and when they have higher prior management forecast error. We also find that the appointment of a CFO outside director to the audit committee is followed by a lower likelihood of restatement and more accurate management forecast. Together, our results suggest that firms respond to accounting failures by appointing outside directors with CFO experience. Thus, we provide insight into the signals firms use to identify weaknesses in the monitoring of the accounting function and the types of expertise firms value in addressing those weaknesses.

RETRACTED: Forecast of compensation amount based on big data network and machine learning algorithm in intellectual property law

Management profit forecasting determines the cash compensation of performance target executives. Agency theory is consistent with the material, and found that the sense of monetary compensation with executive power is different to the extent that the initial expected management of realized income goes higher. Employees are considered an important asset of a business entity. Performance goals are important for both individuals and companies to their satisfaction in doing this work. The retail industry faces similar challenges, positively related to Management Forecast Error (MFE) executive cash compensation and MFE enhancer (weak) Employees' executives present plans to strengthen cash compensation Exceeds current earnings (deficit falls) Relationship, career satisfaction. Another study found that the sensitivity to payback performance very positive and the upper limit of total cash compensation due to MFEs weak. This initial management forecast can be used as a service target in the executive agreement compensation agreement. Compensation forecasting is critical to a company's success; to meet and surpass revenue targets, you need to have an understanding of trends and increasing interest rates will affect your budget. The focus is on bridging the gap between standard and metrological mechanisms up to employee care to categorize. Therefore, this research uses machine learning algorithms (K-algorithms and Simple Vector Machine SVMs) to automatically categorize the management of data personnel from the careful or careless use of the consumer. There are no suitable machine learning mechanisms to manage these research systems. In short, this work can help staff and drive their progress in many areas. Developing and implementing individual learning teaching techniques that help future workers and, potentially capable of, and willing to help people expected to develop.

Strategic Management Forecasts and Accounting Choices: A Case of Employee Downsizing in Japan

ABSTRACT Prior research shows that managers make income-decreasing accounting choices around labor negotiations and predicts that managers disclose bad news during labor negotiations. This study extends the literature by investigating whether disclosure and financial statement reporting practices are consistent during employee downsizing years. Using data from Japanese domestic firms during the period 2002–2016, we find that beginning-of-period management forecasts (i.e., disclosure) are positively associated with during-period negative stock returns for downsizing firms but not for non-downsizing firms. Also, downsizing firms report more conservative earnings at the end of the fiscal year (i.e., financial statement reporting). Our supplementary analyses show no difference in an association between management forecast errors and stock returns between downsizing and non-downsizing firms with during-period negative stock returns, nor in an association between discretionary accruals and employee downsizing. These results suggest that managers strategically inform firms' prospects during employee downsizing years. JEL Classifications: G34; J51; M41. Data Availability: Data are available from the public sources cited in the text.

Can Managers Be Wrong and Still Be Right? An Examination of the Future Realization of Current Management Forecast Errors

ABSTRACT We examine whether management forecast errors (MFEs), which are traditionally interpreted as backward-looking indicators of how well forecasts preempted earnings announcements, also operate as forward-looking measures that aid with predicting future earnings. This possibility arises if an MFE represents unrealized revenues or expenses a manager originally anticipated to occur in the forecast period but that ultimately occur in subsequent periods. Consistent with this possibility, we document that optimistic MFEs contain incremental information over current earnings for predicting future earnings realizations. This finding does not extend to pessimistic MFEs, consistent with such errors reflecting expectations management. The predictive information in optimistic MFEs is negatively related to managers' incentives to intentionally bias the forecast and is positively related to managerial ability. Analysts' post-earnings announcement forecasts for the subsequent period overestimate the future realization of MFEs, but such overestimation is less severe when managers issue timely post-earnings announcement forecast revisions for subsequent periods. Data Availability: Data used in this study are publicly available from sources identified in the text. JEL Classifications: D80; G14; G17; M41.

Management forecast errors and corporate investment efficiency

This paper examines the relation between management forecast errors and corporate investment efficiency. If managers’ forecasting biases systematically affect both external earnings forecasts and internal investment project payoff forecasts, errors in management earnings forecasts will be linked to corporate investment decisions. Consistent with this conjecture, I find that signed management forecast errors are associated with abnormal investment; specifically, more optimistic forecasts are associated with more over-investment, while more pessimistic forecasts are associated with more under-investment. Furthermore, I find that the link between forecast errors and abnormal investment is stronger when analyst feedback reinforces managers’ forecast errors and when managers display persistent forecast errors. Additional tests that consider managers’ disclosure incentives reveal that the link between forecast errors and abnormal investment is stronger when forecast errors are less likely driven by managers’ intentional distortions.

Faultlines among Senior Executives, Internal Control and Corporate Disclosure

We investigate whether faultlines among senior executives are associated with internal control effectiveness and corporate disclosure outcomes. Faultlines are hypothetical dividing lines splitting a group into subgroups based on the simultaneous alignment or overlap of members’ demographic characteristics (e.g., Lau and Murnighan 2005). Faultlines among senior executives create conflicts, impede information sharing and divert managerial attention from common-goal task to handling conflicts. Therefore, we hypothesize that faultlines among senior executives compromise internal control effectiveness and corporate disclosure quality. Following organizational and social psychology literature, we construct faultline measures based on executive characteristics such as age, gender, educational background, tenure, and expertise. Consistent with our hypotheses, we find that faultlines among senior executives are positively associated with material internal control weaknesses, and negatively with its remediation. We further find that faultlines among senior executives are positively associated with 10-k filing delay, financial restatements, and management forecast errors, which also support our hypotheses. Implications for theory and practice are discussed.

R&D Intensity and Regulation Fair Disclosure

This study examines the relationship between R&D intensity and disclosure. R&D activities are essential in bringing innovation to companies. However, R&D activities are naturally uncertain and increase information asymmetry. Thus, firms with high R&D activities are more likely to have the incentive to communicate the potential of R&D investment to the market through voluntary disclosure and, concurrently, resolve information asymmetry. Meanwhile, incentives to less voluntary disclosure exist because of the proprietary cost and the risk of competitiveness loss. Furthermore, the uncertainties inherent in R&D activities caused the possible decrease in the information accuracy. For the two opposing views, this study investigates the relationship between R&D intensity and disclosure frequency using the Regulation Fair Disclosure data in Korea. Moreover, the relationship between R&D intensity and usefulness of the information disclosed is also examined. Using firm sample listed in the 2011-2016 Korea Stock Market, results show that firms with high R&D intensity make disclosures more frequent. Subsequently, the analysis using forecast sample shows that management forecast error is higher in firms with high R&D intensity. This research contributes to the existing literature by presenting evidence that R&D intensity is a significant factor affecting manager's disclosure behavior and information usefulness.

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.

How the Interplay between Financial and Nonfinancial Measures Affects Management Forecasting Behavior

ABSTRACTThis study examines how the interplay between financial and nonfinancial measures (NFMs) affects management forecasting behavior. Building on the knowledge that NFMs are typically aligned with actual earnings and are likely incorporated into earnings forecasts, we investigate if the level of divergence between changes in NFMs and contemporaneous changes in earnings influences management forecasting behavior. We hand collect company-specific NFMs disclosed in 10-K filings and describe how a greater divergence between NFMs and earnings (i.e., NFM changes substantially outpacing earnings growth, or vice versa) is associated with greater uncertainty about the underlying business. As such, in more divergent settings, we observe that management is less likely to issue guidance. Consistent with our theory, for managers that do provide guidance in more divergent settings, management forecast errors increase. Last, we provide evidence that external stakeholders can use the level of divergence to predict future management forecasting behavior.JEL Classifications: G14; M40; M41.Data Availability: The data used in this study are publicly available from the sources indicated in the text.

The Effect of Bank Loan Dependence on Management and Analyst Forecasts

This paper investigates whether and how dependence on bank loans affects management and analyst forecasts in Japan, where indirect finance has played an important role in financial arrangements for many years. We study 4,681 firm-year observations listed on the Japanese equity market from 2001 to 2011, and we show the following results. First, the dependence on bank loans increases management forecast errors. Second, the dependence on bank loans increases analyst forecast errors and dispersions but decreases analyst coverage. Third, dependence on bank loans decreases the value relevance of management and analyst forecasts. These empirical results show that disclosure and information environment are not good for firms that depend on bank loans. Furthermore, management and analyst forecasts are less incorporated in stock prices because investors rely on bank monitoring and do not utilize firms’ public disclosures or other information, such as analyst forecasts, for those who depend on bank loan. Analyst coverage, analyst forecast accuracy, and forecast agreement are all lower for firms having long term-established relationships with banks in Japan. By contrast, our research contributes two things. First, we show that disclosure of firms that are dependent on bank loans are inadequate. More specifically, management forecasts of firms that are dependent on bank loans are less accurate. Second, we reveal that management and analyst forecasts are less incorporated in stock prices in firms that are reliant on bank loans.

Initial public offering prospectus forecast errors and mandatory explanations: evidence from New Zealand

AbstractThis paper examines management forecast errors in initial public offering (IPO) prospectuses of New Zealand firms and subsequent management explanations for earnings forecast errors in recent years. New Zealand has several unique features and recent changes that are worthy of research, including the requirement for management to make forecasts; a requirement to explain differences between forecast and actual; and a recent change that provides the voluntary opportunity to obtain a negative assurance opinion on forecasts. Using hand‐collected IPO data between 1998 and 2014, we find that firms that include a negative assurance opinion on the prospective financial information in the prospectus have more accurate earnings and cash flow forecasts. We investigate the subsequent explanations for forecast errors, which are mandated by a financial reporting standard. We show that management tends to attribute negative and large forecast errors to external causes rather than their own actions. Our findings have implications for regulators and investors in New Zealand and other settings.

The information content of management sales forecasts

We investigate the information content of management sales forecasts by developing an incremental accruals measure. We examine whether market efficiently prices this incremental accrual component. We further relate the incremental accrual measure with management earnings forecast errors testing its effect on manager’s forecast accuracy. Our findings indicate sales forecasts to contain valuable information. We find a significant association between our incremental accruals measure and future stock returns, implying that market participants can benefit by utilizing information released through sales forecasts. Finally, we find a significant negative association between the incremental accrual component and management forecast errors, above historical accruals.

Benchmark for Earnings Performance: Management Forecasts Versus Analysts' Forecasts

We investigate the incremental information conveyed by management forecast errors over and above the consensus analyst forecast error at the time of earnings announcement. To the extent that analysts rationally revise their forecasts to subsume information contained in management releases, it is reasonable to argue that management forecasts are dated and that the revised analyst forecasts would constitute the more timely benchmark to evaluate performance. We find that when management guidance appears to be unsuccessful, management forecast errors convey information to the stock market that is not reflected in the consensus analyst forecast error. In contrast, we do not find that management forecast errors convey additional information over and above the consensus analyst forecast error when management guidance appears to be successful. JEL classification : G14, G24, G29, M41

Audit quality and attributes of management earnings forecasts

PurposeThe purpose of this study is to examine the impact of auditor type on management’s choice of forecast precision and management forecast errors, including the effects of corporate governance. The authors use a different sample and a larger period of years to determine whether prior inferences are robust across these dimensions as well as various corporate governance and other control variables.Design/methodology/approachThis quasi-experimental study uses archival data in regression-based analyses.FindingsThe authors find firms with Big 5 auditors issue forecasts that have larger forecast errors are biased downward and are less precise. The inferences of this study are robust to the inclusion of corporate governance variables, along with an extensive number of control variables found important in prior studies.Research limitations/implicationsWhile the sample and time period may be limited, the authors have no evidence this biases the results.Practical implicationsMore stringent auditing may have an unintended consequence of reducing the informativeness of management forecasts, as managers act strategically in regards to forecast accuracy, bias and precision.Social implicationsThe inferences of this study indicate that while higher quality audits could constrain earnings management, higher quality audits may induce management to provide forecasts that have greater errors, may be biased and may be less informative.Originality/valueThe results and inferences of this study suggest that the inferences in prior studies hold across a different sample and a different time period. This is important given concerns in the academic community regarding the extent to which prior studies can be replicated.

Management Sales Forecasts and Incremental Accruals

We investigate the importance of sales forecasts, voluntarily disclosed by management, on the understanding of the accrual component of earnings. The challenging global economic environment, with unanticipated changes, emphasizes the importance of accrual- based reporting on investment decisions. On that ground we develop an incremental accrual measure, derived by management sales forecasts, and relate it with management earnings forecast errors intending to capture additional information valuable to capital market participants. We find a negative and significant association between the incremental accrual component of earnings and management forecast errors, over and above historical current accruals. These findings are supportive to the argument that voluntary disclosures mitigate information asymmetry and are useful in improving investors’ perception on future business performance. In terms of returns prediction, we find a significant association between the incremental accruals measure and future stock returns, implying that market participants can benefit by utilizing valuable information released through voluntary disclosed management sales forecasts.

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.