Quality Of Management Forecasts Research Articles

Common institutional investors and the quality of management earnings forecasts-Empirical and machine learning evidences.

Based on the data of the Chinese A-share listed firms in China Shanghai and Shenzhen Stock Exchange from 2014 to 2021, this article explores the relationship between common institutional investors and the quality of management earnings forecasts. The study used the multiple linear regression model and empirically found that common institutional investors positively impact the precision of earnings forecasts. This article also uses graph neural networks to predict the precision of earnings forecasts. Our findings have shown that common institutional investors form external supervision over restricting management to release a wide width of earnings forecasts, which helps to improve the risk warning function of earnings forecasts and promote the sustainable development of information disclosure from management in the Chinese capital market. One of the marginal contributions of this paper is that it enriches the literature related to the economic consequences of common institutional shareholding. Then, the neural network method used to predict the quality of management forecasts enhances the research method of institutional investors and the behavior of management earnings forecasts. Thirdly, this paper calls for strengthening information sharing and circulation among institutional investors to reduce information asymmetry between investors and management.

Management Faultlines and Management Forecasts*

ABSTRACTWe examine whether management faultlines (i.e., dissimilar groupings among executives) are related to management forecast processes and outcomes. Management faultlines are formed based on the simultaneous alignment of senior executives' demographic characteristics (e.g., an MBA background, elite school education, gender, board experience, age, or tenure). We argue that management faultlines impede information sharing, create conflicts, and divert managerial attention away from common‐goal tasks. We hypothesize and find that management faultlines are associated with lower management forecast quality. Furthermore, the faultline effect is more pronounced when forecasting difficulty is high. In contrast, the faultline effect is mitigated when a firm nurtures a supportive and diverse workplace. In addition, we find that management forecast propensity and frequency are negatively associated with management faultlines. Overall, our findings suggest that management faultlines compromise management forecast processes and outcomes. In particular, since faultlines can arise as a company diversifies, boards should be aware of these unintended consequences and how they can be mitigated.

Bank Competition and the Quality of Management Forecasts

Bank Competition and the Quality of Management Forecasts

Impact of Tournament Incentives on Management Earnings Forecasts

This paper examines how rank-order tournament incentives in the top management team (TMT) influence the quality of management earnings forecasts (MEFs). Instead of breeding feelings of inequality and fostering peer sabotage, the large pay gap between the CEO and subordinates may motivate top executives to issue more accurate and precise forecasts to win the prize of promotion. The positive tournament effect on the quality of MEFs is weakened (strengthened) when the perceived probability of promotion for candidates is low (high). We find that firms with higher tournament incentives are more likely to issue supplementary forecasts to increase the credibility of MEFs. By examining the tournament effect at each subordinate manager level, we find that CFOs are the driving force in controlling the frequency and quality of management forecasts and chief marketing officers (CMOs) may also contribute to the quality of management forecasts. The results are robust to multiple measures of tournament incentives and multiple research designs.

Mandatory vs. voluntary disclosure of management forecast in China

ABSTRACT This study examines the difference in management forecast quality under mandatory vs. voluntary disclosure in China’s stock markets in terms of management forecasting error (MFE) and value relevance. The results of MFE tests reveal that the disclosure approach is significantly associated with forecast accuracy, and voluntarily disclosed forecasts are more accurate than mandatorily disclosed forecasts. In terms of value relevance, the results are also consistent with the belief that in China’s stock markets, management forecast quality under voluntary disclosure is higher than that under mandatory disclosure.

Analyst Coverage and Managers’ Disclosure of Forward-Looking Information

Prior research documents that managers respond to an exogenous decrease in analyst coverage by increasing the quantity of earnings forecasts, presumably to fill the information void left by a reduction in coverage. I extend this research by considering management forecast quality and an alternative form of guidance, managers’ forward-looking textual disclosures. First, although forecast quantity increases after loss of coverage and liquidity partially improves, I find forecast quality decreases (i.e., larger signed and unsigned errors) and the decrease in quality attenuates the improvement in liquidity. These results suggest analysts not only play an informational role, but also a monitoring role with respect to managers’ forward-looking disclosures. These findings are more pronounced when other monitors are less present and when managers have insider selling incentives to engage in this disclosure behavior. Second, with respect to textual disclosures, managers’ quantity and tone of forward-looking statements increase following loss of coverage. Although these results do not vary with the presence of other monitors, the increase in positive tone is concentrated in managers who engage in insider selling. Overall, my study provides a more nuanced view of analysts’ role in influencing managers’ forward-looking disclosures.

Towards a More Transparent Disclosure for Corporate Sustainability: Focusing on the Regulation of Unfaithful Disclosure Designation

This study explored the effect of corporate governance on disclosure transparency, coming from the changes of the largest shareholder and the designation as an unfaithful disclosure firm. In addition, the study verified whether this designation on a firm increases voluntary disclosure level the following year. According to results of analyzing nonfinancial firms listed in the Korea stock market from 2009 to 2017, the more frequently the largest shareholder changed in the recent three years, the significantly higher the possibility of the firm in being designated as an unfaithful disclosure firm. For firms that were designated as unfaithful disclosure firms, voluntary disclosure significantly increased the following year. These results were strengthened by the addition of several more analyses including quality of management forecasts, consideration of fixed-effects regression and the mediation modeling. These results imply the necessity for the supervision of authorities to take caution, while it shows the effectiveness of the unfaithful disclosure designation regulation in improving disclosure transparency.

CSR, Management Forecast Quality, and Financial Return: Function of CSR Fit

Prior studies have recognized the presence of corporate social responsibility (CSR) fit and the benefits of achieving a better fit. However, these studies have largely overlooked the firm-specific factors that can explain why some firms achieve a better CSR fit while the others cannot in the first place. To fill this gap, we examine if environmental scanning ability moderates the relationship between CSR and corporate financial performance (CFP) by allowing firms to identify and conduct better-fitting CSR practices. In the analysis, we use management forecast quality (MFQ) as an observable practice that reflects such scanning ability of firms. We find that the moderating effect is dependent on two types of CSR. As for instrumental CSR, firms with high MFQ use their scanning ability to satisfy their stakeholder demands more effectively and, in turn, derive more economic values from their CSR investment. On the other hand, regarding moral CSR, firms with high MFQ similarly achieve a better CSR fit, but this creates more social values for the society while imposing more extra costs on the firms.

Managerial Ability and the Quality of Firms’ Information Environment

In this study, we examine the relation between managerial ability and the quality of a firm’s information environment. An emerging stream of research has identified managerial ability as an important determinant of accruals quality and management forecast quality. However, our understanding of the impact of managerial ability on a firm’s broader information environment is incomplete because it captures more than these specific financial reporting disclosures. Using a composite index based on various proxies for a firm’s information environment, we find a positive relation between managerial ability and a firm’s information environment. Consistent with our argument that managers’ equity incentives improve disclosure quality, we find that the quality of a firm’s information environment improves when managers have higher levels of equity incentives. We contribute to the literature by providing more complete and conclusive evidence about the impact of managerial ability on a firm’s broader information environment.

Clarity Begins at Home: Internal Information Asymmetry and External Communication Quality

ABSTRACTThis paper investigates the effect of internal information asymmetry (IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company's stock (DIFRET). Numerous validation tests indicate that DIFRET indeed captures the information asymmetry between divisional managers and top managers. In our primary tests, we find that DIFRET is associated negatively with the accuracy, bias, specificity, and frequency of management forecasts. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET. Our results, thus, suggest that external communication quality suffers when the information asymmetry between divisional managers and top managers is more severe.

Discussion of “The effects of forecast type and performance-based incentives on the quality of management forecasts”

In this paper, I provide a summary and discussion of Chen, Rennekamp, and Zhou (2015). Doing so allows me the opportunity to discuss three interrelated themes – forecasting, motivated reasoning, and disaggregation. Following my summary, I discuss specific opportunities to extend this line of research. I also offer examples of more general extensions related to the psychology and economics of disaggregation.

The effects of forecast type and performance-based incentives on the quality of management forecasts

Understanding forecasts is important because of their pervasiveness in business decisions such as budgeting, production, and financial reporting. In this study we use an abstract experiment to examine how the preparation of disaggregated forecasts interacts with performance-based incentives to influence the accuracy and optimism of forecasts. We manipulate two factors between subjects at two levels each: forecast type (disaggregated or aggregated) and performance-based incentives (present or absent). Consistent with our predictions, we find that (1) preparing disaggregated forecasts leads to greater improvements in forecast accuracy (compared to preparing aggregated forecasts) in the absence of performance-based incentives than in the presence of performance-based incentives, and (2) preparing disaggregated forecasts leads to greater increases in forecast optimism (compared to preparing aggregated forecasts) in the presence of performance-based incentives than in the absence of performance-based incentives. Our study contributes to our understanding of unintentional biases in the forecasting process. Our results have important practical implications for designers of management control systems who elicit internal forecasts from managers. Finally, our results also have important practical implications for those who either prepare or use external management forecasts.

Clarity Begins at Home: Internal Information Asymmetry and External Communication Quality

This paper investigates the effect of internal information asymmetry (hereafter IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company’s stock (DIFRET). Firms with higher DIFRET issue less accurate management forecasts that also exhibit greater pessimistic bias and lower specificity. Management forecasts are also less frequent among firms with higher DIFRET. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET, and weaknesses in internal control systems are particularly detrimental for the quality of both management forecasts and financial statements when DIFRET is higher. Our results are robust to controlling for endogeneity and cannot be attributed to restrictions on top managers’ insider trading.

The Quality of Management Forecasts of Capital Expenditures and Store Openings in MD&A

We study the quality of retailers’ forecasts of planned capital expenditure and store openings provided in Management’s Discussion and Analysis (MD&A). These are important examples of forward-looking information included in MD&A. To examine the quality of these forecasts, we evaluate whether they possess five desirable attributes of management forecasts, namely, unbiasedness, efficiency, high explanatory power, incremental informativeness, and sufficient-statistic efficiency (meaning that the forecasts incorporate all available information). We find no evidence of bias in the forecasts. We find that the forecasts have high explanatory power and substantial incremental informativeness relative to historical information. In our in-sample tests, we find evidence of inefficiency and sufficient-statistic inefficiency, but our out-of-sample tests find no significant evidence of either, which suggests that it is difficult to improve on these management forecasts. Overall, the evidence indicates that the forecasts are of high quality. These findings contribute to our understanding of the general quality of MD&A information and our results help explain findings that MD&A disclosures are associated with future accounting results and reduced cost of capital.

The Effects of Forecasting Approach and Performance-Based Incentives on the Quality of Management Forecasts

Forecasts are vital to every business organization and are key inputs to business decisions such as budgeting, compensation and financial reporting. In this study, we use an abstract experiment to examine how the extent of disaggregation in a management forecast interacts with performance-based incentives to influence the accuracy and bias of management forecasts. We manipulate two factors between subjects at two levels each: forecast type (Disaggregated or Aggregated Forecasts) and performance-based incentives (Presence or Absence of performance-based incentives). Consistent with our predictions, we find that (1) in the absence of performance-based incentives, providing disaggregated forecasts leads to more accurate forecasts than providing aggregated forecasts; while (2) an ordinal interaction between forecast type and performance-based incentives such that providing disaggregated forecasts leads to greater forecast optimism than providing aggregated forecasts in the presence of performance-based incentives, but not in the absence of performance-based incentives. Our study bridges the gap between management accounting and financial accounting research by opening the “black box” of management forecasts and highlighting how internal budgeting and forecasting approaches affect the quality of externally reported forecasts. Our results have important practical implications for managers and investors.

Management Forecast Quality and Capital Investment Decisions

ABSTRACTCorporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. In this study, we investigate whether the quality of managers' externally reported earnings forecasts can be used to infer the quality of their corporate investment decisions. Relying on the intuition that managers draw on similar skills when generating external earnings forecasts and internal payoff forecasts for their investment decisions, we predict that managers with higher quality external earnings forecasts make better investment decisions. Consistent with our prediction, we find that forecasting quality is positively associated with the quality of both acquisition and capital expenditure decisions. Our evidence suggests that externally observed forecasting quality can be used to infer the quality of capital budgeting decisions within firms.JEL Classifications: D83, G31, M41Data Availability: Data are available from public sources identified in the paper.

Management Forecasts and the Cost of Equity

Francis et al. (2008) find the surprising result that management forecasts are positively associated with firms’ cost of equity. We re-examine the relationship between the two by separating different attributes of management forecasts and looking into cross-sectional variation in the relationship. We find that the cost of equity is negatively associated with management forecast quality (forecast specificity, accuracy and credibility), but not robustly related to management forecast quantity (frequency), after controlling for earnings quality and other factors. The effect of forecast quality is stronger for smaller firms and firms with lower analyst following. These results are consistent with the theoretical prediction that voluntary disclosure reduces the cost of equity, but primarily for firms with relatively poor information environments.

The Quality of Management Forecasts of Capital Expenditures and Store Openings

We study the quality of retailers' forecasts of planned capital expenditures and store openings. We examine five desirable attributes of management forecast quality: unbiasedness, efficiency, explanatory power, incremental informativeness, and sufficient-statistic efficiency (meaning that the forecasts summarize all available information). We find forecasts are unbiased, have high explanatory power and have substantial incremental informativeness relative to alternative historical information. In our in sample tests, we find evidence of inefficiency and sufficient statistic inefficiency, but our out of sample tests find no significant evidence of either. That suggests that it is difficult to improve on these management forecasts. Overall the evidence indicates that these forecasts are of high quality. These findings contribute to our understanding of the general quality of MD&A information, management forecasts in general, and the reasons why MD&A disclosures are associated with future accounting results and reduced cost of capital. The findings also provide some support for recent arguments that encourage requiring information on the ex post accuracy of estimates.