Managerial discretion over initial earnings forecasts

Takuya Iwasaki, Norio Kitagawa and Akinobu Shuto

Pacific-Basin Finance Journal, 2023, vol. 77, issue C

Abstract: We investigate managerial discretion over initial management earnings forecasts issued concurrently with earnings announcements. Japan's unique reporting environment, particularly its systematic bundled management forecasts, produces an earnings benchmark (i.e., forecast innovations) to which most studies have paid little attention. A forecast innovation is the difference between management earnings forecasts for year t + 1 and actual earnings for year t at the earnings announcement date. We investigate whether and why managers manipulate their initial forecasts to avoid negative forecast innovations, and how investors respond to them. First, we find that managers engage in forecast management through discretionary forecasts to avoid negative forecast innovations. Second, we reveal that firms that avoid negative forecast innovations enjoy a higher return, even when managers manipulate their forecasts. Finally, we indicate that firms that avoid negative forecast innovations using discretionary forecasts report lower future performance. Overall, our evidence suggests that managers bias their forecasts opportunistically, which has significant implications for investors and regulators.

Keywords: Management forecast; Forecast management; Forecast innovation; Japan (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X22001871
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:77:y:2023:i:c:s0927538x22001871

DOI: 10.1016/j.pacfin.2022.101892

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().