Credibility of Management Forecasts

Rodney L. White Center for Financial Research Working Paper No. 07-02

51 Pages Posted: 27 May 2003  

Jonathan L. Rogers

University of Colorado at Boulder - Leeds School of Business

Phillip C. Stocken

Tuck School of Business at Dartmouth

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

We examine how the market's ability to assess the truthfulness of management earnings forecasts affects the extent to which managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying the predictable bias in forecasts. We find that managers more likely to face litigation release less optimistic forecasts than managers less likely to face litigation, and this incentive is dampened when it is more difficult to detect whether managers have misrepresented their forward-looking information. Further, when it is more difficult to detect forecast bias, we find that managers are more likely to offer forecasts that increase their profits from insider transactions and managers of financially distressed firms are more optimistic than those of healthy firms. With regard to the stock price response to forecasts, we find the market's immediate response varies with the predictable bias in good but not bad news forecasts. The market's subsequent response, however, is consistent with investors eventually identifying the bias in bad news forecasts and modifying their valuation of the firm in the appropriate direction.

Keywords: voluntary disclosure, credibility, management forecasts, insider trading, litigation

JEL Classification: M41, M45, D82, G14

Suggested Citation

Rogers, Jonathan L. and Stocken, Phillip C., Credibility of Management Forecasts (April 2003). Rodney L. White Center for Financial Research Working Paper No. 07-02. Available at SSRN: https://ssrn.com/abstract=401700 or http://dx.doi.org/10.2139/ssrn.401700

Jonathan L. Rogers

University of Colorado at Boulder - Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

Phillip C. Stocken (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

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