How Disaggregation Enhances the Credibility of Management Earnings Forecasts PDF Download
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Author: D. Eric Hirst
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
An important problem facing firm managers is how to enhance the credibility, or believability, of their earnings forecasts. In this paper, we experimentally test whether a characteristic of an earnings forecast from managementyacute;namely, whether it is disaggregatedyacute;can affect its credibility. We also test whether disaggregation moderates the relation between managerial incentives and forecast credibility. Disaggregated forecasts include an earnings forecast as well as forecasts of other key line items comprising that earnings forecast. Our results indicate that disaggregated forecasts are judged to be more credible than aggregated ones and that disaggregation works to counteract the effect of high incentives. We also develop and test an original model that explains how disaggregation positively impacts three factors that, in turn, influence forecast credibility: perceived precision of management's beliefs, perceived clarity of the forecast, and perceived financial reporting quality. We show that forecast disaggregation works to remedy incentive problems only via its effect on perceived financial reporting quality. Overall, our study adds to our understanding of how firm managers can credibly communicate their expectations about the future to market participants.
Author: D. Eric Hirst
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
An important problem facing firm managers is how to enhance the credibility, or believability, of their earnings forecasts. In this paper, we experimentally test whether a characteristic of an earnings forecast from managementyacute;namely, whether it is disaggregatedyacute;can affect its credibility. We also test whether disaggregation moderates the relation between managerial incentives and forecast credibility. Disaggregated forecasts include an earnings forecast as well as forecasts of other key line items comprising that earnings forecast. Our results indicate that disaggregated forecasts are judged to be more credible than aggregated ones and that disaggregation works to counteract the effect of high incentives. We also develop and test an original model that explains how disaggregation positively impacts three factors that, in turn, influence forecast credibility: perceived precision of management's beliefs, perceived clarity of the forecast, and perceived financial reporting quality. We show that forecast disaggregation works to remedy incentive problems only via its effect on perceived financial reporting quality. Overall, our study adds to our understanding of how firm managers can credibly communicate their expectations about the future to market participants.
Author: Kenneth J. Merkley
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
We provide archival evidence on how a particular type of supplementary information affects the credibility of management earnings forecasts. Managers often provide detailed forecasts of specific income statement line items to shed light on how they plan to achieve their bottom-line earnings targets. We assess the effect of this forecast disaggregation on the credibility of management earnings forecasts. Based on a relatively large hand-collected sample of 900 management earnings forecasts, we find that disaggregation increases analysts' sensitivity to the news in managers' earnings guidance, suggesting that analysts find the guidance more credible. More importantly, we identify several factors that influence this relation. First, disaggregation plays a more important role when earnings are otherwise more difficult to forecast. Second, disaggregation is more important after Regulation Fair Disclosure prohibited selective disclosure, especially for firms that were more affected because they had previously provided more private guidance. Finally, in contrast to common assertions in the prior literature, we find that in more recent years, disaggregation matters more for guidance that conveys bad news. Managers as well as researchers should be interested in evidence suggesting that financial analysts find disaggregation especially helpful in contexts where managers' credibility is particularly important.
Author: Timothy D. Cairney
Publisher:
ISBN:
Category :
Languages : en
Pages : 384
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Book Description
Author: Lei Dong
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper examines how the level of disaggregation in earnings forecasts influences investors' reactions to earnings surprises. Previous research finds that investors respond more favorably to a disaggregated forecast than to an aggregated one immediately after the forecast. However, given that earnings forecasts are necessarily followed by earnings announcements, this initial characterization portrays an incomplete picture of forecast disaggregation without its effect on investor reaction following actual earnings outcome. Using an experiment, we present evidence that investors react negatively to forecast inaccuracy irrespective of the valence of the earnings news. Further, in line with expectation violation theory, the negative reactions are amplified for a disaggregated forecast when compared with an aggregated forecast. Consequently, we find that the initial favorable perceptions following a disaggregated forecast are diluted in a positive earnings surprise condition and disappear in a negative earnings surprise condition. Our mediation test suggests that the downward adjustments in investment interest are fully mediated by the impairment of perceived management credibility. Our findings suggest that disaggregated disclosures are not always beneficial, and add to the growing literature concerning the costs and benefits of accounting information disaggregation.
Author: Jong-Hag Choi
Publisher:
ISBN:
Category :
Languages : en
Pages : 286
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Book Description
Author: Shana Clor-Proell
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
Firms often issue disaggregated earnings forecasts, and prior research reveals benefits to doing so. However, we hypothesize and experimentally find that the benefits of disaggregated forecasts do not necessarily carry over to the time of actual earnings announcements. Rather, disaggregated forecasts create multiple points of possible comparison between the forecast and the subsequent earnings announcement. Thus, when firms disaggregate forecasts and subsequently release disaggregated actual earnings numbers, investors reward firms that beat those multiple benchmarks, but punish firms that miss those multiple benchmarks. Thus, we show that issuing a disaggregated earnings forecast to achieve the associated benefits can backfire after the announcement of actual earnings. Our results have implications for researchers and firm managers.
Author: Somnath Das
Publisher:
ISBN:
Category :
Languages : en
Pages : 55
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Book Description
We study circumstances when analysts' forecasts diverge from managers' forecasts after management guidance, and the consequences of this divergence for investors and analysts. Our results show that investors' return response to earnings surprises based on analyst forecasts is significantly weaker when analyst and management forecasts diverge, and that this attenuating effect is stronger when the management forecast is more credible. When the divergent management forecast is more accurate than the analyst consensus forecast, the subsequent-quarter analyst consensus forecast is significantly more accurate than that of the current quarter, and exhibits less serial correlation. Overall, our findings suggest that, when analyst and management forecasts diverge, investors find the two sources to contain complementary information, and analysts learn to improve their subsequent forecasts.
Author: Bin Ke
Publisher:
ISBN:
Category :
Languages : en
Pages : 55
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Book Description
We examine the consequences of a management earnings forecast regulation implemented in a staggered manner. The regulation substantially increases the directly affected firms' frequency of management forecasts. Nevertheless, approximately 14% of the directly affected firms fail to comply with the regulation (noncompliant firms). The regulation helps increase the stock price informativeness of the directly affected firms that issue a forecast. The regulation also helps increase the stock price informativeness of the noncompliant firms (a spillover), but we find no evidence of a similar spillover for the firms that are not required to issue mandatory forecasts in the post-regulation period.
Author: Lei Dong
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
Prior research finds that investors respond more favorably to a disaggregated earnings forecast than to an aggregated one immediately after the forecast. The present study examines the impact of this initial favorable effect on investors' decisions following earnings surprise announcements. Based on Expectation Violation Theory, we posit that the benefit of a disaggregated earnings forecast can backfire when management subsequently reports an earnings surprise. The results of our experiment indicate that investors' negative reactions are stronger if they first observed a disaggregated forecast than if they first saw an aggregated forecast. We find that investors make the greatest downward adjustments in investment interest when the disaggregated forecast is later found to be disappointing. This study provides evidence of the complexity of the effect of disaggregated earnings forecast and adds to the literature concerning the costs and benefits of accounting information disaggregation.
Author: Vicky Arnold
Publisher: Emerald Group Publishing
ISBN: 0857241389
Category : Business & Economics
Languages : en
Pages : 231
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Book Description
Focuses on the social context that influences accounting as well as the means for supporting information production and dissemination, that is, technology. This title includes studies that examine both the short-term implications of technology use on individuals and the long-term implications of technology on organizational evolution.
