Risk-Based Forecasting and Planning and Management Earnings Forecasts

67 Pages Posted: 6 Dec 2016 Last revised: 9 May 2017

See all articles by Christopher D. Ittner

Christopher D. Ittner

University of Pennsylvania - Accounting Department

Jeremy Michels

University of Pennsylvania - Accounting Department

Date Written: December 5, 2016

Abstract

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

Ittner, Christopher D. and Michels, Jeremy, Risk-Based Forecasting and Planning and Management Earnings Forecasts (December 5, 2016). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2881110 or http://dx.doi.org/10.2139/ssrn.2881110

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7786 (Phone)
215-573-2054 (Fax)

Jeremy Michels (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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