Mutual Fund Manager Forecasting Behavior

Richard H. Willis

Journal of Accounting Research, 2001, vol. 39, issue 3, 707-725

Abstract: I examine publicly released annual earnings forecasts issued in conjunction with stock recommendations by mutual fund managers of actively managed open‐end mutual funds. I find that mutual fund manager annual earnings forecasts systematically overestimate the earnings number later disclosed at the annual earnings announcement. In further analyses, I attempt to distinguish between two explanations for this forecast bias: an untruthful reporting bias (market manipulation) and a truthful cognitive bias (optimism). These explanations generate different predictions about the timing of changes in fundholdings of forecasted securities between the forecast release and annual earnings announcement dates. I interpret my findings as more consistent with an optimism explanation for mutual fund manager annual forecast bias and less consistent with a market manipulation explanation for this bias. I am, however, unable to eliminate an unobservable selection bias either in the decision of the mutual fund manager to report a forecast publicly or in the media’s decision to publish that forecast as an explanation for my finding that mutual fund manager forecasts are biased.

Date: 2001
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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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