Management Forecasts and the Persistence of Earnings and Earnings Components

Abstract

We investigate the implications of voluntary forecasting activity on the persistence of actual reported figures. We further explore the impact of managements’ error direction (i.e. pessimistic versus optimistic manager) on the persistence of actual reported figures. We finally explore whether forecasting activity can be used as a vehicle useful in obtaining profitable investment strategies. The empirical evidence supports the intuition that management forecasts indicate actual accounting figures of higher reporting quality. Moreover, pessimistic managers provide more persistent accounting figures than optimistic managers. Finally, the evidence suggests that forecasting activity occurrence indicates different quality implications for Forecasters relative to non-Forecasters, creating thus ground for creating profitable investment portfolio combinations.

Keywords: Management Forecasts, Earnings Persistence, Reporting Quality

JEL Classification: M41