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Do Managers Always Know Better? Relative Accuracy of Management and Analyst Forecasts

Journal of Accounting Research, Forthcoming

39 Pages Posted: 29 Apr 2012  

Amy P. Hutton

Boston College - Carroll School of Management

Lian Fen Lee

Boston College - Carroll School of Management

Susan Shu

Boston College - Carroll School of Management

Date Written: April 1, 2012

Abstract

We examine the relative accuracy of management and analyst forecasts of annual EPS. We predict and find that analysts’ information advantage resides at the macroeconomic level. They provide more accurate earnings forecasts than management when a firm’s fortunes move in concert with macroeconomic factors such as gross domestic product and energy costs. In contrast, we predict and find that management’s information advantage resides at the firm level. Their forecasts are more accurate than analysts’ when management’s actions, which affect reported earnings, are difficult to anticipate by outsiders, such as when the firm’s inventories are abnormally high, the firm has excess capacity, or is experiencing a loss. While analysts are commonly viewed as industry specialists, we fail to find evidence that analysts have an information advantage over managers at the industry level. The two have comparable abilities to forecast earnings for firms with revenues or earnings that are more synchronous with their industries.

Keywords: analyst, management forecast, forecast accuracy

JEL Classification: G14, G30, K22, M41, M45, D82, M40

Suggested Citation

Hutton, Amy P. and Lee, Lian Fen and Shu, Susan, Do Managers Always Know Better? Relative Accuracy of Management and Analyst Forecasts (April 1, 2012). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2047107

Amy P. Hutton (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Lian Fen Lee

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Susan Shu

Boston College - Carroll School of Management ( email )

Boston College
140 Commonwealth Ave.
Chestnut Hill, MA 02167
United States
617-552-1759 (Phone)

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