Management forecasts: Biases, incentives, and spillover effects

Ronald A. Dye and Sri S. Sridharan

RAND Journal of Economics, 2024, vol. 55, issue 4, 788-814

Abstract: Management earnings forecasts (MEF), a form of voluntary disclosure, are different from most other disclosures because MEF have spillover effects on managers' subsequent operating decisions and earnings reports. These effects arise from managers' attempts to reduce their forecast errors. Even though managers can separate their firms from less profitable firms by issuing forecasts the latter cannot match, there is no equilibrium where all managers issue forecasts. We show that managers who issue (resp., don't issue) MEF choose above (resp., below) first‐best operating actions. We identify which managers issue MEF and why allowing managers to misreport earnings may increase expected earnings.

Date: 2024
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