Can Managers be Wrong and Still be Right? An Examination of the Future Realization of Current Management Forecast Errors

The Accounting Review, Forthcoming https://doi.org/10.2308/TAR-2016-0376

57 Pages Posted: 5 Jun 2020 Last revised: 18 Jun 2020

See all articles by Michael D. Kimbrough

Michael D. Kimbrough

University of Maryland - Robert H. Smith School of Business

Hanna Lee

University of Maryland - Robert H. Smith School of Business

Yue Zheng

Hong Kong University of Science & Technology (HKUST)

Date Written: April 3, 2020

Abstract

We examine whether management forecast errors (MFEs), which are traditionally interpreted as backward-looking indicators of how well forecasts preempted earnings announcements, also operate as forward-looking measures that aid with predicting future earnings. This possibility arises if an MFE represents unrealized revenues or expenses a manager originally anticipated to occur in the forecast period but that ultimately occur in subsequent periods. Consistent with this possibility, we document that optimistic MFEs contain incremental information over current earnings for predicting future earnings realizations. This finding does not extend to pessimistic MFEs, consistent with such errors reflecting expectations management. The predictive information in optimistic MFEs is negatively related to managers’ incentives to intentionally bias the forecast and is positively related to managerial ability. Analysts’ post-earnings announcement forecasts for the subsequent period overestimate the future realization of MFEs but such overestimation is less severe when managers issue timely post-earnings announcement forecast revisions for subsequent periods.

Keywords: management forecast errors; earnings prediction; earnings uncertainty.

JEL Classification: D80, G14, G17, M41

Suggested Citation

Kimbrough, Michael D. and Lee, Hanna and Zheng, Yue, Can Managers be Wrong and Still be Right? An Examination of the Future Realization of Current Management Forecast Errors (April 3, 2020). The Accounting Review, Forthcoming https://doi.org/10.2308/TAR-2016-0376 , Available at SSRN: https://ssrn.com/abstract=3597747

Michael D. Kimbrough (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States
301-405-8222 (Phone)
301-314-9414 (Fax)

Hanna Lee

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Yue Zheng

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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