Budgets, Internal Reports and Manager Forecast Accuracy

Abstract

This study investigates the association between the accuracy of revenue forecasts and the accounting activities of budget preparation and internal accounting report preparation. While both budgets and internal reports are widely used, empirical evidence concerning their influence on the prediction of future performance is extremely limited. Consistent with the availability of formal accounting information improving predictive performance, we observe that internal accounting report preparation significantly improves forecast accuracy. However, partitioning firms by forecasting difficulty reveals that the accuracy benefits from internal reports preparation are only observed for firms with high uncertainty. Further, the results provide limited support for linkages between budget preparation and forecast accuracy. While we observe the use of budget preparation and internal accounting report preparation are a function of firms' structural and environmental characteristics, firms do not appear to adopt these activities as a function of forecasting difficulty, but rather as a function of predicted changes in future growth.

Keywords: absolute forecast error, budgeting, forecasting, internal reporting

JEL Classification: M10, M40, M41, M46