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

Posted: 28 Dec 2012 Last revised: 16 Nov 2013

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Juan Manuel Sanchez

University of Texas at San Antonio

Date Written: December 27, 2012

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.

Suggested Citation

Cassell, Cory A. and Huang, Shawn X. and Sanchez, Juan Manuel, Forecasting Without Consequence? Evidence on the Properties of Retiring CEOs’ Forecasts of Future Earnings (December 27, 2012). The Accounting Review, Vol. 88, No. 6, pp. 1909-1937, 2013. Available at SSRN: https://ssrn.com/abstract=2194228 or http://dx.doi.org/10.2139/ssrn.2194228

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Shawn X. Huang (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Juan Manuel Sanchez

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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