Risk-Based Forecasting and Planning and Management Earnings Forecasts
67 Pages Posted: 6 Dec 2016 Last revised: 9 May 2017
Date Written: December 5, 2016
This study examines the association between a firm’s internal information environment and the accuracy of its externally-disclosed management earnings forecasts. Internally, firms use forecasts to plan for uncertain futures. The risk management literature argues that integrating risk-related information into forecasts and plans can improve a firm’s ability to forecast future financial outcomes. We investigate whether this internal information manifests itself in the accuracy of external earnings guidance. Using detailed survey data and publicly-disclosed management earnings forecasts from a sample of publicly-traded U.S. companies, we find that more sophisticated risk-based forecasting and planning processes are associated with smaller earnings forecast errors and narrower forecast widths. These associations hold across a variety of different planning horizons (ranging from annual budgeting to long-term strategic planning), providing empirical support for the theoretical link between internal information quality and the quality of external disclosures.
Keywords: management earnings guidance; budgeting; planning; forecasting; risk management
JEL Classification: G31, M41
Suggested Citation: Suggested Citation