CEO Ability and Management Earnings Forecasts

Posted: 13 Mar 2011 Last revised: 11 Nov 2019

See all articles by Bok Baik

Bok Baik

Seoul National University

David B. Farber

Indiana University Kelley School of Business Indianapolis

Sam (Sunghan) Lee

Iowa State University; Iowa State University - Department of Accounting and Finance

Date Written: February 23, 2011

Abstract

Trueman (1986) theorizes that managers voluntarily issue earnings forecasts to signal their ability. Consistent with this theory, we find that the likelihood and frequency of management earnings forecast issuance increase with CEO ability, as proxied by (i) press citations, (ii) a measure generated from data envelope analysis, and (iii) industry-adjusted ROA during a specific CEO’s tenure. We also report that firms with high ability CEOs issue more accurate forecasts compared to firms with low ability CEOs and that the market is more responsive to the news in forecasts associated with higher ability CEOs compared to the news in forecasts associated with lower ability CEOs. These results suggest that CEO ability adds credibility to management forecasts. Overall, our study highlights that a personal characteristic of the CEO is associated with an important voluntary disclosure.

Keywords: CEO Ability, Management Earnings Forecasts

JEL Classification: M40

Suggested Citation

Baik, Bok and Farber, David B. and Lee, Sam (Sunghan), CEO Ability and Management Earnings Forecasts (February 23, 2011). Contemporary Accounting Research, Vol. 28 No. 5 (Winter 2011), pp. 1645–1668. Available at SSRN: https://ssrn.com/abstract=1782927

Bok Baik

Seoul National University ( email )

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

David B. Farber (Contact Author)

Indiana University Kelley School of Business Indianapolis ( email )

801 W Michigan Ave
Indianapolis, IN 46202
United States

Sam (Sunghan) Lee

Iowa State University ( email )

Gerdin Building 3323
Ames, IA 50010
United States

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

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