Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies

Christopher S. Armstrong, Antonio Dávila, George Foster and John R. M. Hand ()
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Christopher S. Armstrong: Stanford University
Antonio Dávila: Universidad de Navarra
George Foster: Stanford University
John R. M. Hand: Kenan-Flagler Business School

Review of Accounting Studies, 2007, vol. 12, issue 2, No 2, 183-215

Abstract: Abstract This paper studies the properties and determinants of managers’ multi-year financial forecasts. Using one- to five-year-ahead forecasts reported by private venture-backed firms, we ask whether, by how much, and why biases in managers’ forecasts of revenues, expenses and profits depend on the forecasting horizon and the verifiability of assets. We find that profitability forecasts contain a strategic component, in that [1] one-year-ahead revenue (expense) forecasts are slightly and asymmetrically pessimistic (optimistic), while five-year-ahead forecasts are hugely and asymmetrically optimistic (pessimistic); and [2] biases in revenue and expense forecasts are larger, the harder to verify or more intangible-intensive are firms’ assets.

Keywords: Management forecasts; Optimism; Strategic biases; Venture capital; G24; M13; M41 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/s11142-007-9033-4

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