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http://ssrn.com/abstract=401700
 
 

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Credibility of Management Forecasts


Jonathan L. Rogers


University of Chicago - Booth School of Business

Phillip C. Stocken


Dartmouth College - Tuck School of Business

April 2003

Rodney L. White Center for Financial Research Working Paper No. 07-02

Abstract:     
We examine how the market's ability to assess the truthfulness of management earnings forecasts affects the extent to which managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying the predictable bias in forecasts. We find that managers more likely to face litigation release less optimistic forecasts than managers less likely to face litigation, and this incentive is dampened when it is more difficult to detect whether managers have misrepresented their forward-looking information. Further, when it is more difficult to detect forecast bias, we find that managers are more likely to offer forecasts that increase their profits from insider transactions and managers of financially distressed firms are more optimistic than those of healthy firms. With regard to the stock price response to forecasts, we find the market's immediate response varies with the predictable bias in good but not bad news forecasts. The market's subsequent response, however, is consistent with investors eventually identifying the bias in bad news forecasts and modifying their valuation of the firm in the appropriate direction.

Number of Pages in PDF File: 51

Keywords: voluntary disclosure, credibility, management forecasts, insider trading, litigation

JEL Classification: M41, M45, D82, G14

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Date posted: May 27, 2003  

Suggested Citation

Rogers, Jonathan L. and Stocken, Phillip C., Credibility of Management Forecasts (April 2003). Rodney L. White Center for Financial Research Working Paper No. 07-02. Available at SSRN: http://ssrn.com/abstract=401700 or http://dx.doi.org/10.2139/ssrn.401700

Contact Information

Jonathan L. Rogers
University of Chicago - Booth School of Business ( email )
5807 S Woodlawn
Chicago, IL 60637-1561
United States
773-834-0161 (Phone)
Phillip C. Stocken (Contact Author)
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
603-646-2843 (Phone)
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