Serial Correlation in Management Earnings Forecast Errors

Journal of Accounting Research, Forthcoming

60 Pages Posted: 5 Jan 2011

See all articles by Guojin Gong

Guojin Gong

Penn State University - Smeal College of Business

Laura Yue Li

University of Illinois at Urbana-Champaign

Jundong (Jeff) Wang

San Diego State University - Accountancy

Date Written: January 4, 2011

Abstract

We examine whether management earnings forecast errors exhibit serial correlation and how analysts understand the serial correlation property of management forecast errors. Management forecast errors should not exhibit serial correlation if managers efficiently process information in prior forecast errors and truthfully convey their earnings expectations through management forecasts. However, for long-horizon management forecasts of annual earnings, we find significantly positive serial correlation in management forecast errors, and sample self-selection does not seem to drive this phenomenon. Further analyses suggest that managers’ unintentional information processing bias contributes to this positive serial correlation. Analysts anticipate the inter-temporal persistence of management forecast errors but underestimate the persistence level when reacting to management forecasts. Our findings have implications for market participants who rely on management forecasts to form earnings expectations, and also shed light on the efficiency of managerial decision making.

Keywords: voluntary disclosure, management earnings forecasts, serial correlation

JEL Classification: M41, M43, M45, G14

Suggested Citation

Gong, Guojin and Li, Yue Laura and Wang, Jundong (Jeff), Serial Correlation in Management Earnings Forecast Errors (January 4, 2011). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1734976

Guojin Gong (Contact Author)

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Yue Laura Li

University of Illinois at Urbana-Champaign ( email )

283 Wohlers hall 1206 South Sixth Street
1206 South Sixth Street
Champaign, IL 61820
United States
2172655086 (Phone)

Jundong (Jeff) Wang

San Diego State University - Accountancy ( email )

United States

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