Ex Post Bias in Management Earnings Forecasts: A Study of Potential Determinants

40 Pages Posted: 7 Nov 1999

Date Written: September 22, 1999

Abstract

This study investigates the effect of proprietary information, disclosure-related legal liability, earnings variability, financial distress, and external financing on bias in management earnings forecasts. Bias, specifically ex post bias (as is referred to in the management forecast literature), exists if the expected value of the observed management earnings forecasts differs from actual earnings. The effect of the test variables on ex post bias is investigated by examining whether a firm's forecast error (measure of ex post bias and defined as actual earnings minus management earnings forecast) is a function of the aforementioned variables. Proprietary information, disclosure-related legal liability, and earnings variability are hypothesized to be positively associated with ex post bias, while external financing and financial distress are expected to be negatively correlated. All the independent variables are measured using public information available at the time that the financial statements are released.

Using a sample of 267 management earnings forecasts released during the period 1990-95 in the first three quarters of the fiscal year, I find that these forecasts are on average optimistic. Results from the multivariate regression analysis find that three of the five factors, proprietary information, financial distress and earnings variability, are significant in explaining ex post bias. For the most part, these findings are robust across various sub-samples.

JEL Classification: M41, M43

Suggested Citation

Irani, Afshad Jeevan, Ex Post Bias in Management Earnings Forecasts: A Study of Potential Determinants (September 22, 1999). Available at SSRN: https://ssrn.com/abstract=185448 or http://dx.doi.org/10.2139/ssrn.185448

Afshad Jeevan Irani (Contact Author)

Washington and Lee University ( email )

204 West Washington Street
Lexington, VA 24450
United States
5404588628 (Phone)

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