Misforecasting Earnings: Management Expectations and Capital Market Anomalies

Abstract

Management earnings forecasts are more pessimistic for stocks with higher predicted returns based on anomaly signals, suggesting anomaly captures biases in managers' forecasts. These biases in management forecasts are more severe than those in analyst forecasts. These findings are stronger for overconfident managers, long-term forecasts, and during high sentiment periods, consistent with behavioral issues driving such biases. The results are not affected by the subsequent insider or firm trading, indicating that strategic reporting is unlikely to drive these biases. Finally, biased management forecasts amplify and prolong anomaly returns, consistent with exacerbated errors in investor expectations of future cash flow.

Keywords: Management Expectation, Market Efficiency, Anomalies

JEL Classification: G12, G4