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Are More Able Managers Good Future Tellers? Learning from Japan (Forthcoming in Journal of Accounting and Public Policy)

Souhei Ishida, Takuma Kochiyama and Akinobu Shuto
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Souhei Ishida: The Graduate School of Humanities and Social Sciences, Saitama University
Takuma Kochiyama: The Graduate School of Business Administration, Hitotsubashi University
Akinobu Shuto: The Graduate School of Economics The University of Tokyo

No CARF-F-435, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: Baik, Farber, and Lee (2011) find that high-ability managers in the U.S. are more likely to issue accurate management earnings forecasts. Focusing on Japan, where management earnings forecasts are effectively mandated, we extend the literature by exploring (1) whether the relationship between managerial ability and forecast accuracy is unique to the U.S. disclosure system, where management forecasts are voluntary, and (2) how high-ability managers increase their forecast accuracy. We find that managerial ability is negatively associated with forecast errors based on initial forecasts, suggesting that high-ability managers are more likely to issue accurate forecasts at the beginning of the fiscal year. We then show that high-ability managers are less likely to revise their initial earnings forecasts and less likely to use earnings management to improve the accuracy of their earnings forecasts. Our findings show that, while high-ability managers are more likely to issue accurate initial management forecasts, low-ability managers are more likely to revise their forecasts and conduct earnings management to reduce their forecast errors.

Pages: 61
Date: 2018-05, Revised 2020-11
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