Are All Management Earnings Forecasts Created Equal? Expectations Management Versus Communication

Posted: 4 Dec 2011

See all articles by Yongtae Kim

Yongtae Kim

Santa Clara University - Leavey School of Business

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business

Date Written: December 2, 2011

Abstract

Recent studies associate management earnings forecasts (MEFs) with expectations management. These studies, however, neither provide evidence on the extent and scope of expectations management through MEFs nor consider alternative incentives for issuing MEFs. Consequently, existing evidence does not help regulators assess whether MEFs effectively facilitate communication with investors. We investigate to what extent managers exploit their earnings forecasts as a tool of expectations management or as a communication device. By examining relations among MEFs, analysts’ forecasts, and actual earnings, we classify MEFs into three incentive categories: (1) expectations management, (2) communication, and (3) other incentives. We find that a significant proportion (approximately 45 percent) of MEFs is issued to convey accurate earnings information to the market (that is, communication incentive). We also find that the fraction of MEFs for the expectations-management incentive increases post-Regulation Fair Disclosure. The evidence from examination of the various managerial motives for each incentive category supports our classification. Additional analysis using alternative classifications based on bad/good news and pessimistic/optimistic forecasts reveals that our proposed classification of MEFs works better in defining expectations management than these other classifications. This implies that more caution is warranted in defining expectations management when investigating the association between managerial motives and incentives for issuing MEFs.

Keywords: Management earnings forecast, Expectations management, Communication, Voluntary disclosure

JEL Classification: G17, G30, M41

Suggested Citation

Kim, Yongtae and Park, Myung Seok, Are All Management Earnings Forecasts Created Equal? Expectations Management Versus Communication (December 2, 2011). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1967722

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business ( email )

301 W. Main St.
School of Business
Richmond, VA 23284-4000
United States
(804)828-3161 (Phone)

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