Management Sales Forecasts and Incremental Accruals
39 Pages Posted: 18 Jul 2017
Date Written: December 23, 2016
We investigate the importance of sales forecasts, voluntarily disclosed by management, on the understanding of the accrual component of earnings. The challenging global economic environment, with unanticipated changes, emphasizes the importance of accrual- based reporting on investment decisions. On that ground we develop an incremental accrual measure, derived by management sales forecasts, and relate it with management earnings forecast errors intending to capture additional information valuable to capital market participants. We find a negative and significant association between the incremental accrual component of earnings and management forecast errors, over and above historical current accruals. These findings are supportive to the argument that voluntary disclosures mitigate information asymmetry and are useful in improving investors’ perception on future business performance. In terms of returns prediction, we find a significant association between the incremental accruals measure and future stock returns, implying that market participants can benefit by utilizing valuable information released through voluntary disclosed management sales forecasts.
Keywords: Incremental Accruals, Voluntary Disclosures, Management Sales Forecasts, Firm Performance
JEL Classification: M41, G14
Suggested Citation: Suggested Citation