Do Managers Bias their Forecasts of Future Earnings in Response to their Firm’s Current Earnings Announcement Surprises?
58 Pages Posted: 18 Jul 2019
Date Written: July 18, 2019
Managers issue nearly 90 percent of their earnings forecasts simultaneously with their firm’s current earnings announcement – a practice referred to as the “bundling” of earnings information. We examine whether managers insert bias into these forecasts conditional on the news conveyed in current earnings, and offer three findings. First, managers release optimistically biased earnings forecasts to offset simultaneously released negative current earnings news. Second, managers release pessimistically biased earnings forecasts to offset simultaneously released large positive current earnings news. Third, these results are stronger (1) when managers have more flexibility to bias their forecasts and (2) when managers face greater incentives to alter current earnings perceptions. Additional analysis suggests that initially, market participants are unable to fully identify the bias that managers insert into their bundled forecasts, but that investors unravel the bias subsequently as it is revealed. Overall, our evidence suggests that managers issue biased management forecasts with the earnings announcement to influence perceptions of their firm’s current earnings news.
Keywords: Strategic disclosure, voluntary disclosure, management forecasts, earnings announcements
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