How Disaggregation Enhances the Credibility of Management Earnings Forecasts

Journal of Accounting Research, Vol. 45, No. 4, pp. 811-837, September 2007

27 Pages Posted: 11 Dec 2007

See all articles by D. Eric Hirst

D. Eric Hirst

University of Texas at Austin

Lisa Koonce

University of Texas

Multiple version iconThere are 2 versions of this paper

Abstract

An important problem facing managers is how to enhance the credibility, or believability, of their earnings forecasts. In this paper, we experimentally test whether a characteristic of a management earnings forecast - namely, whether it is disaggregated - 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 managers can credibly communicate their expectations about the future to market participants.

JEL Classification: M41, M45, D82, C91

Suggested Citation

Hirst, D. Eric and Koonce, Lisa L., How Disaggregation Enhances the Credibility of Management Earnings Forecasts. Journal of Accounting Research, Vol. 45, No. 4, pp. 811-837, September 2007, Available at SSRN: https://ssrn.com/abstract=1065885 or http://dx.doi.org/10.1111/j.1475-679X.2007.00252.x

D. Eric Hirst

University of Texas at Austin ( email )

CBA 4M.202 McCombs School of Business
Austin, TX 78712
United States
512-471-5565 (Phone)
512-471-3904 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/Eric.hirst/

Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

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