Abstract

http://ssrn.com/abstract=1919291
 
 

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Changes in Managers’ Forecasting Behavior and the Market’s Assessment of Forecast Quality during Periods of Financial Misreporting


Stephen P. Baginski


University of Georgia - J.M. Tull School of Accounting

Sean T. McGuire


Texas A&M University - Department of Accounting

Nathan Y. Sharp


Texas A&M University - Department of Accounting

Brady J. Twedt


Indiana University - Kelley School of Business - Department of Accounting

April 22, 2014


Abstract:     
We examine the characteristics of management earnings forecasts during periods in which managers possess private (i.e., unobservable to the market) knowledge that they are engaging in financial misreporting (i.e., committing accounting fraud). Using a sample of Securities and Exchange Commission enforcement actions, we find that managers temporarily increase forecast frequency and issue more bad news forecasts in periods of fraud relative to pre-fraud periods and control firms, consistent with the increased use of voluntary disclosure to manage expectations downward while violating constraints on earnings management. The fraud period forecasts are, when compared to fraudulent earnings observed by the market, less ex post biased and more accurate than pre-fraud period forecasts and thus give the appearance of higher quality voluntary disclosures. However, the fraud period forecasts are not less ex post biased or more accurate relative to restated actual earnings, implying that managers neither increase nor decrease the quality of their forecasts during fraud periods. Consistent with these findings, capital market tests show that bad news fraud-period forecasts have a greater impact on prices relative to pre-fraud periods. Further, the enhanced price reactions do not deteriorate after the fraud is made public, suggesting that the public revelation does not taint investors’ rational assessment of the credibility of bad news management forecasts.

Number of Pages in PDF File: 50

Keywords: Management Forecasts, Management Guidance, Voluntary Disclosure, Fraud

JEL Classification: M40, M41, M45

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Date posted: August 30, 2011 ; Last revised: May 14, 2014

Suggested Citation

Baginski, Stephen P. and McGuire, Sean T. and Sharp, Nathan Y. and Twedt, Brady J., Changes in Managers’ Forecasting Behavior and the Market’s Assessment of Forecast Quality during Periods of Financial Misreporting (April 22, 2014). Available at SSRN: http://ssrn.com/abstract=1919291 or http://dx.doi.org/10.2139/ssrn.1919291

Contact Information

Stephen P. Baginski
University of Georgia - J.M. Tull School of Accounting ( email )
Athens, GA 30602
United States
Sean T. McGuire
Texas A&M University - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States
Nathan Y. Sharp (Contact Author)
Texas A&M University (TAMU) - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

Brady J. Twedt
Indiana University - Kelley School of Business - Department of Accounting ( email )
1309 E. 10th Street
Bloomington, IN 47405
United States

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