Credibility of Annual Management Earnings Forecasts
| Author | : Timothy D. Cairney |
| Publisher | : |
| Total Pages | : 384 |
| Release | : 1994 |
| Genre | : |
| ISBN | : |
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Changes in Managers' Forecasting Behavior and the Market's Assessment of Forecast Credibility During Periods of Financial Misreporting
| Author | : Stephen P. Baginski |
| Publisher | : |
| Total Pages | : 58 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
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The capital market benefits of high quality financial reporting create incentives for managers to signal the quality of their voluntary disclosure practices. Prior research focuses on the relations between observable measures of earnings quality and observable measures of voluntary disclosure quality. We examine the characteristics of management earnings forecasts during periods in which managers possess private (i.e., unobservable to the market) knowledge that they are engaging in financial misreporting (i.e., committing accounting fraud). Using a sample of Securities and Exchange Commission enforcement actions, we hypothesize and find that managers issue more bad news forecasts in periods of fraud relative to pre-fraud periods and control firms, consistent with the increased use of voluntary disclosure to manage expectations downward while violating constraints on earnings management. The fraud period forecasts are, when compared to fraudulent earnings observed by the market, less ex post biased and more accurate than pre-fraud period forecasts and thus give the appearance of higher quality voluntary disclosures. However, the fraud period forecasts are not less ex post biased or more accurate when accounting restatements later reveal true actual earnings. A consequence of the perceived increase in quality is greater bad news fraud-period forecast impact on prices relative to pre-fraud periods. Further, the enhanced price reactions do not deteriorate after the fraud is made public, suggesting that the public revelation does not taint investors' assessment of the credibility of bad news management forecasts.
Credibility of Management Earnings Forecasts and Future Returns
| Author | : Akinobu Shuto |
| Publisher | : |
| Total Pages | : 63 |
| Release | : 2013 |
| Genre | : |
| ISBN | : |
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How Disaggregation Enhances the Credibility of Management Earnings Forecasts
| Author | : D. Eric Hirst |
| Publisher | : |
| Total Pages | : 48 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
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An important problem facing firm managers is how to enhance the credibility, or believability, of their earnings forecasts. In this paper, we experimentally test whether a characteristic of an earnings forecast from managementyacute;namely, whether it is disaggregatedyacute;can affect its credibility. We also test whether disaggregation moderates the relation between managerial incentives and forecast credibility. Disaggregated forecasts include an earnings forecast as well as forecasts of other key line items comprising that earnings forecast. Our results indicate that disaggregated forecasts are judged to be more credible than aggregated ones and that disaggregation works to counteract the effect of high incentives. We also develop and test an original model that explains how disaggregation positively impacts three factors that, in turn, influence forecast credibility: perceived precision of management's beliefs, perceived clarity of the forecast, and perceived financial reporting quality. We show that forecast disaggregation works to remedy incentive problems only via its effect on perceived financial reporting quality. Overall, our study adds to our understanding of how firm managers can credibly communicate their expectations about the future to market participants.
Credibility of Management Earnings Forecasts and Future Returns
| Author | : Norio Kitagawa |
| Publisher | : |
| Total Pages | : 64 |
| Release | : 2016 |
| Genre | : |
| ISBN | : |
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This study investigates the effect of managerial discretion over their initial earnings forecasts on future performance. First, by estimating the discretionary portion of initial management earnings forecasts (defined as discretionary forecasts) based on the findings of fundamental analysis research, we find that firms with higher discretionary forecasts are more likely to miss their earnings forecast at the end of the fiscal year and revise their forecasts downward to meet their earnings forecasts for the period, suggesting that forecast management through discretionary forecasting produces less credible management forecasts in terms of ex-post realization. Second, by using the hedge-portfolio test and regression analysis, we find that firms with higher discretionary forecasts earn consistently negative abnormal returns, suggesting that investors do not fully understand the implication of discretionary forecasts for the credibility of management earnings forecasts and thus overprice them at the forecast announcement.
The Effect of Management's Credibility and the Form of Their Earnings Forecasts on Investor Judgment
| Author | : D. Eric Hirst |
| Publisher | : |
| Total Pages | : |
| Release | : 2000 |
| Genre | : |
| ISBN | : |
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To improve the usefulness of financial reporting, the Jenkins Committee has recommended increased disclosure of forward-looking information. To encourage such disclosures, Congress recently passed legislation providing an enhanced quot;safe harborquot; provision designed to shield companies from legal liability for voluntary disclosure of forecasted financial information that later proves incorrect. The purpose of this paper is to test whether investors' reactions to management's disclosures of forward-looking information depend on two factors: the credibility of management (i.e., their competence and tendency to bias their disclosures) and the form of the forecasted information (i.e., whether it is quantitative or qualitative). Results of two experiments reveal that individual investors' judgments are influenced by the credibility of management. Specifically, we find that investors accord higher stock ratings to companies with managements reputed to be competent; we also observe that investors accord higher ratings to managements who do not tend to bias their disclosures. In contrast to our expectations, we do not observe that quantitative disclosures lead to different stock ratings than qualitative disclosures. Finally, we note that these two factors do not interact in their effects on investor judgment. The implications of our findings and future research directions are discussed.
An Analysis of the Reliability of Management Earnings Forecasts Published in Alternative Formats and Investigation of Selected Management Forecast Disclosure Practices
| Author | : William C. Boynton |
| Publisher | : |
| Total Pages | : 354 |
| Release | : 1976 |
| Genre | : Corporations |
| ISBN | : |
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Credibility of Management Forecasts
| Author | : Jonathan L. Rogers |
| Publisher | : |
| Total Pages | : 51 |
| Release | : 2005 |
| Genre | : |
| ISBN | : |
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We examine how the market's ability to assess the truthfulness of management earnings forecasts affects the extent to which managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying the predictable bias in forecasts. We find that managers more likely to face litigation release less optimistic forecasts than managers less likely to face litigation, and this incentive is dampened when it is more difficult to detect whether managers have misrepresented their forward-looking information. Further, when it is more difficult to detect forecast bias, we find that managers are more likely to offer forecasts that increase their profits from insider transactions and managers of financially distressed firms are more optimistic than those of healthy firms. With regard to the stock price response to forecasts, we find the market's immediate response varies with the predictable bias in good but not bad news forecasts. The market's subsequent response, however, is consistent with investors eventually identifying the bias in bad news forecasts and modifying their valuation of the firm in the appropriate direction.
Detailed Management Earnings Forecasts
| Author | : Kenneth J. Merkley |
| Publisher | : |
| Total Pages | : 48 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
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We provide archival evidence on how a particular type of supplementary information affects the credibility of management earnings forecasts. Managers often provide detailed forecasts of specific income statement line items to shed light on how they plan to achieve their bottom-line earnings targets. We assess the effect of this forecast disaggregation on the credibility of management earnings forecasts. Based on a relatively large hand-collected sample of 900 management earnings forecasts, we find that disaggregation increases analysts' sensitivity to the news in managers' earnings guidance, suggesting that analysts find the guidance more credible. More importantly, we identify several factors that influence this relation. First, disaggregation plays a more important role when earnings are otherwise more difficult to forecast. Second, disaggregation is more important after Regulation Fair Disclosure prohibited selective disclosure, especially for firms that were more affected because they had previously provided more private guidance. Finally, in contrast to common assertions in the prior literature, we find that in more recent years, disaggregation matters more for guidance that conveys bad news. Managers as well as researchers should be interested in evidence suggesting that financial analysts find disaggregation especially helpful in contexts where managers' credibility is particularly important.
The Effect of Macro Information Environment Change on the Quality of Management Earnings Forecasts
| Author | : Stephen P. Baginski |
| Publisher | : |
| Total Pages | : 32 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
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The 1990s were characterized by substantial increases in the performance of and investor reliance on financial analysts. Because managers possess superior private information and issue forecasts to align investors' expectations with their own, we predict that managers increased the quality of their earnings forecasts during the 1990s in order to keep pace with the improved forward-looking information provided by financial analysts, upon which investors increasingly relied.Using a sample of 2,437 management earnings forecasts, we document an increase in management earnings forecast precision, management earnings forecast accuracy, and managers' tendency to explain earnings forecasts in 1993-1996 relative to 1983-1986. Given that these forecast characteristics are linked to greater informativeness and credibility, we also document that the information content of management earnings forecasts, as measured by the strength of share price responses to forecast news, increased in 1993-1996 relative to 1983-1986. As expected, the increased information content of management forecasts primarily occurred for firms covered by financial analysts.
