Managerial discretion over initial earnings forecasts “Forthcoming in Pacific-Basin Finance Journalâ€

Takuya Iwasaki, Norio Kitagawa and Akinobu Shuto
Additional contact information
Takuya Iwasaki: Faculty of Business and Commerce, Kansai University
Norio Kitagawa: Graduate School of Business Administration, Kobe University
Akinobu Shuto: Graduate School of Economics, The University of Tokyo

No CARF-F-369, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

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.

Pages: 57
Date: 2012-12, Revised 2022-11
New Economics Papers: this item is included in nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.carf.e.u-tokyo.ac.jp/wp/wp-content/uploads/2015/07/F369.pdf (application/pdf)

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:cfi:fseres:cf369

Access Statistics for this paper

More papers in CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by ().