The Effect of Organizational Complexity on Earnings Forecasting Behavior

45 Pages Posted: 15 Aug 2012 Last revised: 18 Feb 2019

See all articles by Jared N. Jennings

Jared N. Jennings

Washington University in St. Louis

Hojun Seo

Purdue University

Lloyd Tanlu

Washington and Lee University; University of Washington - Department of Accounting; Northeastern University

Date Written: May 31, 2014

Abstract

This paper examines whether organizational complexity affects management’s communication with external market participants. We specifically examine three aspects of organizational complexity – business, geographical, and cost structure complexity. We find evidence consistent with geographical complexity reducing the quantity and quality of management’s communication with external market participants. Specifically, we find that management is less likely to revise its initial forecasts and more likely to bundle its earnings forecasts with earnings announcements. We also find that management issues more pessimistic, less precise, and less accurate earnings forecasts when geographical complexity increases. Cost structure complexity also appears to reduce the quantity and quality of management’s communication with external market participants. Our results suggest that cost structure complexity increases the likelihood of management bundling earnings forecasts and issuing more pessimistic earnings forecasts. This paper adds to the accounting and management literature by further examining how the structural organization of the firm affects the costs and benefits managers face when communicating financial information to external market participants. We also provide an explanation for why managers miss their own forecasts as well as why managers issue pessimistic forecasts.

Keywords: Organizational complexity; Management guidance; earnings forecasts

JEL Classification: M40, M41

Suggested Citation

Jennings, Jared N. and Seo, Hojun and Tanlu, Lloyd D., The Effect of Organizational Complexity on Earnings Forecasting Behavior (May 31, 2014). AAA 2013 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2130119 or http://dx.doi.org/10.2139/ssrn.2130119

Jared N. Jennings

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Hojun Seo

Purdue University ( email )

403 W State St
West Lafayette, IN 47907
United States

Lloyd D. Tanlu (Contact Author)

Washington and Lee University ( email )

Lexington, VA 24450
United States

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Northeastern University ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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