Management Forecasts in Japan: Do Managers Accurately Estimate Costs When They Issue Management Forecasts?
56 Pages Posted: 20 Aug 2013
Date Written: August 19, 2013
Virtually all firms listed on Japanese stock exchanges report point forecasts of sales and earnings in their annual press releases. The availability of management forecasts in Japan provides a unique research opportunity to investigate managers’ prediction of cost behavior of their company. Forecasted costs are available by subtracting forecasted earnings from forecasted sales. Using recent “sticky cost” research methods, the forecasted rate of change in costs can be compared with the actual rate of change in costs. Specifically, I describe the forecasted rate of change in costs as a function of the forecasted rate of change in sales, and comparing the forecasted rate of change in costs with the actual rate of change in costs. The rationale for this approach is, in theory, that costs are resources sacrificed to generate sales; hence, it is generally expected that costs increase (decrease) as sales increase (decrease). Basically, focusing on the relationship between forecasted sales and costs provide deeper insights into management earnings forecasts than focusing on the forecasted earnings because earnings are the aggregated measure of sales and costs. The major findings of this paper are that managers underestimate the rate of increase in costs when sales are expected to increase; however, they tend to overestimate the rate of decrease in costs when sales are expected to decrease, indicating that costs are underestimated regardless of the forecasted direction of change in sales. These findings imply that optimistic bias in management earnings forecasts can partly be attributed to the forecast error of rate of change in costs.
Keywords: Management forecasts, Costs forecasts, Cost behavior, Cost stickiness, Sticky costs
JEL Classification: M41, C33
Suggested Citation: Suggested Citation