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Managerial Incentives and Management Forecast Precision

47 Pages Posted: 17 Jan 2013  

Qiang Cheng

Singapore Management University

Ting Luo

Tsinghua University

Heng Yue

Singapore Management University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: January 17, 2013

Abstract

Managers have great discretion in determining management forecast characteristics, but little is known about how managerial incentives affect these characteristics. In this paper, we examine whether managers strategically choose the precision of their earnings forecasts for self-serving purposes. Building on prior research demonstrating that the market reaction to vague management forecasts is weaker than its reaction to precise forecasts, we find that for management forecasts disclosed before insider sales, more positive (negative) news forecasts are more (less) precise than other management forecasts. The opposite applies to management forecasts disclosed before insider purchases. These results are consistent with managers strategically choosing the precision of their earnings forecasts to increase stock prices before insider sales and to decrease stock prices before insider purchases. Additional analyses indicate that the impact of managerial incentives on forecast precision is less pronounced when institutional ownership is high or when disclosure risk is high, and is more pronounced when it is difficult for investors to assess the precision of managers’ information.

Keywords: management forecast, managerial incentives, insider trading, forecast precision

JEL Classification: G13, G14

Suggested Citation

Cheng, Qiang and Luo, Ting and Yue, Heng, Managerial Incentives and Management Forecast Precision (January 17, 2013). Available at SSRN: https://ssrn.com/abstract=2202064 or http://dx.doi.org/10.2139/ssrn.2202064

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Ting Luo

Tsinghua University ( email )

Weilun #201,School of Economics and Management
Beijing, 100084
China

Heng Yue

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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