The Roles that Forecast Surprise and Forecast Error Play in Determining Management Forecast Precision

Posted: 15 Sep 2006 Last revised: 17 Apr 2013

See all articles by Jong-Hag Choi

Jong-Hag Choi

Seoul National University - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Yoonseok Zang

Singapore Management University - School of Accountancy

David A. Ziebart

University of Kentucky - Gatton College of Business and Economics

Date Written: October 2009

Abstract

Studying the determinants of management forecast precision is important because a better understanding of the factors affecting management’s choice of forecast precision can provide investors and other users with cues about the characteristics of the information contained in the forecasts. In addition, as regulators assess the regulation of voluntary management disclosures, they need to better understand how managers choose among forecast precision disclosure alternatives. Using 16,872 management earnings forecasts collected from 1995 through 2004, we provide strong evidence that forecast precision is negatively associated with the magnitude of the forecast surprise and that this negative association is stronger when the forecast is bad news than when it is good news. We also find that forecast precision is negatively associated with the absolute magnitude of the forecast error that proxies for the forecast uncertainty that managers face when they issue forecasts, and that the negative association is stronger when forecast errors are negative. These results are consistent with greater liability concerns related to bad news forecasts and negative forecast errors, respectively. Our study provides educators and researchers with important insights into management’s choice of earnings forecast precision, which is a component of the voluntary disclosure process that is not well understood.

Keywords: management forecasts, management forecast precision, management forecast surprise, management forecast error

JEL Classification: M41, M45, K22, G12, G38

Suggested Citation

Choi, Jong and Myers, Linda A. and Zang, Yoonseok and Ziebart, David A., The Roles that Forecast Surprise and Forecast Error Play in Determining Management Forecast Precision (October 2009). Accounting Horizons, 2010. Available at SSRN: https://ssrn.com/abstract=1425165

Jong Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Yoonseok Zang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

David A. Ziebart

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

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