Do Managers Bias their Forecasts of Future Earnings in Response to their Firm’s Current Earnings Announcement Surprises?

56 Pages Posted: 18 Jul 2019 Last revised: 18 May 2020

See all articles by Stephen P. Baginski

Stephen P. Baginski

University of Georgia - J.M. Tull School of Accounting

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Patrick Ryu

University of Georgia, J.M. Tull School of Accounting

James Warren

University of Georgia - J.M. Tull School of Accounting

Date Written: May 17, 2020

Abstract

Approximately 90 percent of managers’ earnings forecasts are issued simultaneously with their firm’s current earnings announcement – a practice referred to as the “bundling” of earnings information. We examine whether managers bias these forecasts conditional on the news conveyed in current earnings, and offer three findings. First, managers appear to release optimistically biased earnings forecasts with simultaneously released negative current earnings news. Second, managers appear to release pessimistically biased earnings forecasts with simultaneously released large positive current earnings news. Third, these results (especially for optimistic bias when current earnings news is negative) are stronger when managers: (1) face less analyst monitoring and lower litigation risk, which constrain the ability to bias their forecasts, and (2) face greater career concerns, which create incentives to alter investor perceptions about current earnings. Additional analysis suggests that investors are unable to identify the management forecast bias, but that they unravel the bias subsequently as it is revealed. While no archival study can ascertain management intent, we provide several results that cast doubt on the idea that this management forecast bias behavior is purely unintentional. Overall, our evidence suggests that managers issue biased forecasts with the earnings announcement to influence perceptions of their firm’s current earnings news.

Keywords: Strategic disclosure, voluntary disclosure, management forecasts, earnings announcements

Suggested Citation

Baginski, Stephen P. and Campbell, John L. and Ryu, Patrick and Warren, James, Do Managers Bias their Forecasts of Future Earnings in Response to their Firm’s Current Earnings Announcement Surprises? (May 17, 2020). Available at SSRN: https://ssrn.com/abstract=3421807 or http://dx.doi.org/10.2139/ssrn.3421807

Stephen P. Baginski

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Patrick Ryu

University of Georgia, J.M. Tull School of Accounting ( email )

Athens, GA
United States

James Warren

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
169
Abstract Views
813
rank
192,955
PlumX Metrics