Forecasting Without Consequence? Evidence on the Properties of Retiring CEOs’ Forecasts of Future Earnings

Abstract

We investigate whether retiring CEOs engage in opportunistic terminal-year forecasting behavior and circumstances in which such behavior is likely to be more or less pronounced. Using a within-CEO empirical design, we find that retiring CEOs are more likely to issue forecasts of future earnings, and that they issue such forecasts more frequently, in their terminal year relative to other years during their tenure with the firm. Further, retiring CEOs’ terminal-year forecasts are more likely to convey good news and are more optimistically biased relative to pre-terminal years. Opportunistic terminal-year forecasting behavior is: i) more pronounced in the presence of higher CEO equity incentives and when discretionary expenditures are cut in the terminal year, and ii) less pronounced in the presence of stronger monitoring mechanisms (e.g., higher institutional ownership). Collectively, our results provide evidence on a potential implication of the CEO horizon problem that has not been investigated previously. We expect these results will be of interest to market participants who seek to identify circumstances in which management forecasts might be misleading and to stakeholders (e.g., board of directors and regulators) who seek to develop incentive mechanisms that mitigate such opportunistic behavior.