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Changes In Managers Forecasting Behavior And The Markets Assessment Of Forecast Credibility During Periods Of Financial Misreporting
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Book Synopsis Changes in Managers' Forecasting Behavior and the Market's Assessment of Forecast Credibility During Periods of Financial Misreporting by : Stephen P. Baginski
Download or read book Changes in Managers' Forecasting Behavior and the Market's Assessment of Forecast Credibility During Periods of Financial Misreporting written by Stephen P. Baginski and published by . This book was released on 2015 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: The capital market benefits of high quality financial reporting create incentives for managers to signal the quality of their voluntary disclosure practices. Prior research focuses on the relations between observable measures of earnings quality and observable measures of voluntary disclosure quality. We examine the characteristics of management earnings forecasts during periods in which managers possess private (i.e., unobservable to the market) knowledge that they are engaging in financial misreporting (i.e., committing accounting fraud). Using a sample of Securities and Exchange Commission enforcement actions, we hypothesize and find that managers issue more bad news forecasts in periods of fraud relative to pre-fraud periods and control firms, consistent with the increased use of voluntary disclosure to manage expectations downward while violating constraints on earnings management. The fraud period forecasts are, when compared to fraudulent earnings observed by the market, less ex post biased and more accurate than pre-fraud period forecasts and thus give the appearance of higher quality voluntary disclosures. However, the fraud period forecasts are not less ex post biased or more accurate when accounting restatements later reveal true actual earnings. A consequence of the perceived increase in quality is greater bad news fraud-period forecast impact on prices relative to pre-fraud periods. Further, the enhanced price reactions do not deteriorate after the fraud is made public, suggesting that the public revelation does not taint investors' assessment of the credibility of bad news management forecasts.
Book Synopsis Credibility of Management Forecasts by : Jonathan L. Rogers
Download or read book Credibility of Management Forecasts written by Jonathan L. Rogers and published by . This book was released on 2005 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Forecasts in Times of Crises by : Theo S. Eicher
Download or read book Forecasts in Times of Crises written by Theo S. Eicher and published by International Monetary Fund. This book was released on 2018-03-09 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial crises pose unique challenges for forecast accuracy. Using the IMF’s Monitoring of Fund Arrangement (MONA) database, we conduct the most comprehensive evaluation of IMF forecasts to date for countries in times of crises. We examine 29 macroeconomic variables in terms of bias, efficiency, and information content to find that IMF forecasts add substantial informational value as they consistently outperform naive forecast approaches. However, we also document that there is room for improvement: two thirds of the key macroeconomic variables that we examine are forecast inefficiently and 6 variables (growth of nominal GDP, public investment, private investment, the current account, net transfers, and government expenditures) exhibit significant forecast bias. Forecasts for low-income countries are the main drivers of forecast bias and inefficiency, reflecting perhaps larger shocks and lower data quality. When we decompose the forecast errors into their sources, we find that forecast errors for private consumption growth are the key contributor to GDP growth forecast errors. Similarly, forecast errors for non-interest expenditure growth and tax revenue growth are crucial determinants of the forecast errors in the growth of fiscal budgets. Forecast errors for balance of payments growth are significantly influenced by forecast errors in goods import growth. The results highlight which macroeconomic aggregates require further attention in future forecast models for countries in crises.
Book Synopsis The Joint Impact of Commitment to Disclosure and Prior Forecast Accuracy on Managers' Forecasting Credibility by : Shankar Venkataraman
Download or read book The Joint Impact of Commitment to Disclosure and Prior Forecast Accuracy on Managers' Forecasting Credibility written by Shankar Venkataraman and published by ProQuest. This book was released on 2000 with total page 113 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Joint Effect of Management's Prior Forecast Accuracy and the Form of its Financial Forecasts on Investor Judgment by : D. Eric Hirst
Download or read book The Joint Effect of Management's Prior Forecast Accuracy and the Form of its Financial Forecasts on Investor Judgment written by D. Eric Hirst and published by . This book was released on 2000 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine how investor reaction to management earnings forecasts is a joint function of the form of the forecast and management's perceived credibility. In a laboratory experiment involving 126 individual investors, we compare investors' earnings predictions and their confidence therein after receiving point and closed range forecasts issued by managements whose previous forecasting accuracy is known to be either high or low. We used point and range forecasts, because they differ in the degree to which they communicate management's uncertainty about the future. We use management's prior forecasting accuracy as a measure of management's credibility, because prior research has documented the importance of this factor when considering the usefulness of management's voluntary forecasts.Our results show that, as expected, investors' earnings predictions are responsive to management's forecasts. However, as we hypothesized, forecast form did not influence investors' earnings estimates. In contrast, investors' confidence in their earnings predictions was influenced by the form of management's forecasts, but this effect emerged only when management was previously accurate in their forecasting. A similar interactive pattern was found in the dispersion of investors' predictions about the company's future earnings. Finally, consistent with the hypothesis that confidence is an important determinant of investor behavior, we find that investors' judgments of future stock price appreciation are a positive function of both unexpected earnings and the change in their confidence.Our study extends the literature on management forecasts by empirically testing the joint influence of management's credibility (i.e., forecasting accuracy) and forecast form. The prior literature has argued that both factors should be important, but has not delineated whether or how these two factors might interact. We present a theoretical framework that indicates when both factors should influence investor judgment.
Book Synopsis Determinants of Earnings Forecast Error, Earnings Forecast Revision and Earnings Forecast Accuracy by : Sebastian Gell
Download or read book Determinants of Earnings Forecast Error, Earnings Forecast Revision and Earnings Forecast Accuracy written by Sebastian Gell and published by Springer Science & Business Media. This book was released on 2012-03-26 with total page 144 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings forecasts are ubiquitous in today’s financial markets. They are essential indicators of future firm performance and a starting point for firm valuation. Extremely inaccurate and overoptimistic forecasts during the most recent financial crisis have raised serious doubts regarding the reliability of such forecasts. This thesis therefore investigates new determinants of forecast errors and accuracy. In addition, new determinants of forecast revisions are examined. More specifically, the thesis answers the following questions: 1) How do analyst incentives lead to forecast errors? 2) How do changes in analyst incentives lead to forecast revisions?, and 3) What factors drive differences in forecast accuracy?
Book Synopsis The Impact of Management's Tone on the Perception of Management's Credibility in Forecasting by : Robert D. Slater
Download or read book The Impact of Management's Tone on the Perception of Management's Credibility in Forecasting written by Robert D. Slater and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: ABSTRACT: The purpose of this study is to examine the impact of management altering its tone in communications on participants' perceptions of management credibility. Management's tone in communicating with participants was manipulated using communications from management under two treatment conditions. In period one of the study management's tone was manipulated within the management statement on internal controls as required by the Public Company Accounting Oversight Board's (PCAOB) Auditing Standards No. 2. In period one, participants had no knowledge of management's prior forecasting accuracy. Consistent with predicted hypotheses, the findings reveal that management can increase its credibility with participants by communicating its empathy, responsiveness, and understanding. Management's increased credibility was measured using both a validated credibility scale and by examining participants' reliance on management's forecasts. In period two of the study all participants had knowledge of management's forecast failure in period one. The results from period two found that tone could impact the rating of management's credibility when management had previously failed to meet a forecast but that tone had no impact on participant's changes in their earnings per share estimates after management had previously failed to meet a forecast.
Book Synopsis The Impact of Forecast Roundness, Forecast Uncertainty, and Managers' Language on Investors' Judgments by : Jessica Osgood
Download or read book The Impact of Forecast Roundness, Forecast Uncertainty, and Managers' Language on Investors' Judgments written by Jessica Osgood and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Management forecasts can have varying degrees of roundness, including sharp (e.g., a sales growth forecast of 9.73% or 10.27%), explicitly round (e.g., 10.00%), and rounded (e.g., 10%). Prior archival research indicates investors rely less upon round than sharp forecasts (Bamber, Hui, and Yeung 2010), yet it is unclear why this occurs or how contextual features of earnings forecasts moderate this effect. Moreover, this prior research has not distinguished between the effects of explicitly round versus rounded estimates. I provide evidence that the impact of forecast roundness on willingness to invest depends upon forecast uncertainty. That is, rounded sales forecasts enhance management credibility and make investors more willing to invest, but only when the level of forecast uncertainty is higher. Furthermore I find that investors react to explicitly round and rounded forecasts differently (i.e., 10.00% versus 10%), with explicitly round forecasts leading to higher willingness to invest when uncertainty is lower versus when uncertainty is higher similar to rounded forecasts. I also examine and find that managers can alter their language to repair credibility concerns resulting from a mismatch between forecast roundness and forecast uncertainty. Overall, my results show how a change as seemingly innocuous as rounding a sales forecast can alter investors' perceptions of management credibility and their willingness to invest. For example, my findings suggest conditions in which companies using a sharp underlying sales forecast to meet an earnings target can improve investors' perceptions by simply rounding the sales forecast disclosed while keeping the underlying number sharp. To the extent that investors react negatively to a mismatch between forecast roundness and forecast uncertainty, my results provide information to financial managers about how to carefully construct earnings forecasts to limit these negative reactions.
Book Synopsis Disclosure of Corporate Forecasts to the Investor by : Financial Analysts Federation
Download or read book Disclosure of Corporate Forecasts to the Investor written by Financial Analysts Federation and published by . This book was released on 1973 with total page 216 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Are Markets Rational? by : Seung-Woog Kwag
Download or read book Are Markets Rational? written by Seung-Woog Kwag and published by . This book was released on 2002 with total page 110 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Credibility of Managerial Forecast Disclosure - Game Theory and Regulative Implications by : Michael Dobler
Download or read book Credibility of Managerial Forecast Disclosure - Game Theory and Regulative Implications written by Michael Dobler and published by . This book was released on 2005 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Managerial forecast disclosure has gained increasing interest. Besides voluntary publication, managers are more and more obliged to disclose forecasts by recent accounting regulation. This acknowledges the common proposition that forecasts were exceptionally relevant and decision useful information for investors. But it neglects the problems of credibility arising from the non-verifiable nature of forecasts. My paper analytically investigates the credibility of managerial forecast disclosure introducing a game theoretic perspective by extracting robust implications from disclosure models. The analysis is two-fold, aiming first at a non-regulated environment and second at an environment with audit or liability systems. The results are alarming: Without enforcement, forecast credibility is linked to very restrictive conditions. In particular, unfavourable forecasts, e.g. going concern uncertainties, will be withheld. Different audit and litigation systems may increase or may lessen, but not eliminate the deficits. Upon the results of my analysis, I derive general regulative implications on enforcement mechanisms, managerial information endowment, and disclosure. These may assist but cannot assure the credibility of managerial forecast disclosure. In conclusion, whatever regulatory steps are taken, the value of forecast publication currently discussed in the context of voluntary prospective value reporting and mandatory risk reporting appears to be overestimated.
Book Synopsis Financial distress and the credibility of management earnings forecasts by : Adam Stuart Koch
Download or read book Financial distress and the credibility of management earnings forecasts written by Adam Stuart Koch and published by . This book was released on 1999 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Management Forecast Credibility and Underreaction to News by : Jeffrey Ng
Download or read book Management Forecast Credibility and Underreaction to News written by Jeffrey Ng and published by . This book was released on 2013 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we first document evidence of underreaction to management forecast news. We then hypothesize that the credibility of the forecast influences the magnitude of this underreaction. Relying on evidence that more credible forecasts are associated with a larger reaction in the short window around the management forecasts and a smaller post-management forecast drift in returns, we show that the magnitude of the underreaction is smaller for firms that provide more credible forecasts. Our paper contributes to the literature by providing out-of-sample evidence of the drift in returns documented in the post-earnings-announcement drift literature, with the credibility of the news being one explanation for the phenomenon.
Book Synopsis Essays on Forecasting and Misreporting by : Mario Schabus
Download or read book Essays on Forecasting and Misreporting written by Mario Schabus and published by . This book was released on 2017 with total page 153 pages. Available in PDF, EPUB and Kindle. Book excerpt: "In this dissertation, I examine two relevant topics for managers and capital market participants, namely firms' forecasting and their reporting choices. Increasing our understanding of firms forecasting practices is relevant as we learn about the means of firms to assess economic uncertainty. The findings presented in chapter 2 suggest that well-connected board members are able to provide managers with information about macroeconomic or industry-wide developments, which facilitates the quality of managers forecasts. These findings indicate the importance of directors' advisory role, as opposed to their well-studied monitoring duties. In chapter 4, I show how forecasting processes interplay with managers reporting choices. The results indicate that more elaborate forecasting processes lead to less misreporting, suggesting that focus on forecasting processes reduces the need for potentially costly misreporting at the end of the fiscal year. In chapter 3, I examine the impact of firm-initiated clawbacks on the firm's incentive compensation design decisions. The results suggest that the increased misreporting costs enable firms to increase the incentives for productive effort while at the same time safeguarding financial reporting integrity. I examine the research questions outlined in this dissertation by means of standard as well as more sophisticated microeconometric techniques. I collect data of U.S.-listed firms from public available sources. The data collected of Dutch firms are confidential and were collected by means of a survey. This dissertation contains three stand-alone studies, where two are co-authored with my promoter Frank Verbeeten and my co-promoter Peter Kroos."--Samenvatting auteur.
Book Synopsis An Empirical Assessment of the Credibility Premium Associated with Meeting or Beating Both Time-Series Earnings Expectations and Analysts' Forecasts by : Nicholas Dopuch
Download or read book An Empirical Assessment of the Credibility Premium Associated with Meeting or Beating Both Time-Series Earnings Expectations and Analysts' Forecasts written by Nicholas Dopuch and published by . This book was released on 2003 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research results indicate a market premium for firms that met or beat analysts' forecasts. We find evidence consistent with these results. More important, however, we find a market premium for firms that met or beat time-series forecasts, and also the highest market premium for firms that met or beat both analysts' and time-series forecasts, relative to firms that met or beat one or neither forecast. In fact, there is no premium for firms that met or beat only analysts' or only time-series forecasts. Investors seem to consider both analysts' and time-series forecasts jointly, with the act of meeting or beating both forecasts providing the most credible signal of superior future financial performance. This 'credibility' premium to firms that met or beat time-series forecasts (as proxied for by the Foster model, 1977) is in addition to the premium for meeting or beating analysts' forecasts. The premium is supported by assessments of future financial performance over the two subsequent years and by tests of the predictability of earnings for the following quarter. Finally, we find that abnormal trading was greatest when both forecasts were met or beaten, compared to when only one or the other or neither forecast was met or beaten. This is further evidence that investors view the meeting or beating of both forecasts as the strongest signal of enhanced credibility in reported earnings.
Book Synopsis Earnings Management by : Joshua Ronen
Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008-08-06 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Book Synopsis Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts by : Amy P. Hutton
Download or read book Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts written by Amy P. Hutton and published by . This book was released on 2009 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the properties of firms' forecasting records and whether the accuracy of their prior earnings forecasts affects investor response to their subsequent forecasts. Within the context of a Bayesian model of investor learning, we find that the stock price response to management forecast news is increasing in prior forecast accuracy and also in the length of a firm's forecasting record. Further, we document that investors are more responsive to extreme good and bad news forecasts when a firm has an established forecasting record. Overall, these results suggest that a firm's prior forecasting behavior allows it to establish a forecasting reputation.
