Career Concerns and Management Forecast Precision

Evolutionary program ensembles are developed and tested for minimum temperature forecasts at Chicago, Illinois, at forecast ranges of 36, 60, 84, 108, 132, and 156 h. For all forecast ranges examined, the evolutionary program ensemble outperforms the 21-member GFS model output statistics (MOS) ensemble when considering root-mean-square error and Brier skill score. The relative advantage in root-mean-square error widens with forecast range, from 0.18°F at 36 h to 1.53°F at 156 h while the probabilistic skill remains positive throughout. At all forecast ranges, probabilistic forecasts of abnormal conditions are particularly skillful compared to the raw GFS guidance. The evolutionary program reliance on particular forecast inputs is distinct from that obtained from considering multiple linear regression models, with less reliance on the GFS MOS temperature and more on alternative data such as upstream temperatures at the time of forecast issuance, time of year, and forecasts of wind speed, precipitation, and cloud cover. This weighting trends away from current observations and toward seasonal (climatological) measures as forecast range increases. Using two different forms of ensemble member subselection, a Bayesian model combination calibration is tested on both ensembles. This calibration had limited effect on evolutionary program ensemble skill but was able to improve MOS ensemble performance, reducing but not eliminating the skill gap between them. The largest skill differentials occurred at the longest forecast ranges, beginning at 132 h. A hybrid, calibrated ensemble was able to provide some further increase in skill.

Several theories of reputation and herd behavior (e.g., Scharfstein and Stein (1990) and Zweibel (1995)) suggest that herding among agents should vary with career concerns. Our goal is to document whether such a link exists in the labor market for security analysts. We find that inexperienced analysts are more likely to be terminated for inaccurate earnings forecasts than are their more experienced counterparts. Controlling for forecast accuracy, they are also more likely to be terminated for bold forecasts that deviate from the consensus. Consistent with these implicit incentives, we find that inexperienced analysts deviate less from consensus forecasts. Additionally, inexperienced analysts are less likely to issue timely forecasts, and they revise their forecasts more frequently. These findings are broadly consistent with existing career concern motivated herding theories.

ABSTRACTManagerial career concerns could affect firm efficiency through financial reporting quality, but this important link has received relatively little attention in the literature. The present study examines this link by developing a model that has the following elements. A risk‐neutral manager provides effort to increase the market value of the firm and to favorably influence the market assessment of the manager's ability. Depending on the magnitude of career concerns, the manager either underinvests or overinvests effort relative to an efficiency‐maximizing level. The analysis identifies conditions under which higher‐quality reporting induces the manager to invest more effort. Under these conditions, the model is extended to a setting in which the manager also chooses the quality of financial reporting at some cost. In doing so, managers seek to reduce distortion in their effort investment. The equilibrium reporting quality and effort investment are determined by a trade‐off between them. In the presence of high uncertainty about the firm's future cash flows, if the manager's career concerns exceed a threshold the manager underinvests in reporting quality and overinvests effort. The empirical implication is a negative relation between managerial career concerns and financial reporting quality. To a large extent, this is consistent with findings in prior empirical studies. Thus, the present study offers a theoretical explanation for the empirical findings as an equilibrium outcome.

Management Forecasts of Capital Investment and Earnings, the Cost of Equity Capital and Corporate Governance in Japan

This paper evaluates the informativeness of analysts' ratings and earnings forecast information contained in analyst reports beyond what is publicly provided by management earnings forecasts. Using only analyst reports that have been released practically simultaneously with management forecasts, I find that both analysts' ratings and earnings forecasts have incremental information content conditional on management forecasts. Further analysis also reveals that analysts' earnings forecasts are significantly more accurate than concurrently-announced management earnings forecasts. Overall, the findings in this paper present strong evidence that analysts offer informational value to the market beyond information that is provided by company management.

The spillover effect of regulatory penalties on management and analysts’ earnings forecasts: Empirical evidence based on directors networks in China

SYNOPSIS: Studying the determinants of management forecast precision is important because a better understanding of the factors affecting management’s choice of forecast precision can provide investors and other users with cues about the characteristics of the information contained in the forecasts. In addition, as regulators assess the regulation of voluntary management disclosures, they need to better understand how managers choose among forecast precision disclosure alternatives. Using 16,872 management earnings forecasts collected from 1995 through 2004, we provide strong evidence that forecast precision is negatively associated with the magnitude of the forecast surprise and that this negative association is stronger when the forecast is bad news than when it is good news. We also find that forecast precision is negatively associated with the absolute magnitude of the forecast error that proxies for the forecast uncertainty that managers face when they issue forecasts, and that the negative association is stronger when forecast errors are negative. These results are consistent with greater liability concerns related to bad news forecasts and negative forecast errors, respectively. Our study provides educators and researchers with important insights into management’s choice of earnings forecast precision, which is a component of the voluntary disclosure process that is not well understood.

The role of debt contracts in analyst earnings forecasts

ABSTRACT: Existing literature assumes that the order and timing of analysts' earnings forecasts are determined exogenously. However, analysts choose when to issue their forecasts. This study develops a model that endogenizes the timing decision of analysts and analyzes their equilibrium timing strategies. In the model, analysts face a trade-off between the timeliness and the precision of their forecasts. The model introduces a timing game with two analysts, derives and analyzes its unique pure strategies equilibrium, and provides new empirical predictions about the precision and timing of analysts' forecasts. The equilibrium has one of two patterns: either the times of the analysts' forecasts cluster, or there is a separation in the times of the forecasts. The less informed and less similar the analysts are, the more likely it is that they forecast at different points in time. All else equal, analysts with a higher precision of initial private information tend to forecast earlier, and analysts with a higher learning ability tend to forecast later.

This chapter highlights the features of and issues in the disclosure of management earnings forecasts (MEFs) in Japan. In Japan, listed companies are mandated to publish MEFs, which can also be considered a function of self-discipline for the companies. Meanwhile, prior studies in the US and Japan have reported that earnings forecasts contain a variety of biases stemming from company characteristics and executive incentives. There is a risk for Japanese companies in using biased forecasts for self-discipline. For instance, since Japan does not mandate the election of outside directors, unlike the US or Europe, companies do not have functioning external monitoring. Thus, in this chapter, we examined the relationship between optimism in earnings forecasts and the presence of outside directors. Boards composed only of internal directors may prepare more optimistic forecasts, which may be mitigated by electing outside directors who bring a neutral, external perspective. The results of our inquiry elucidated that optimism in some portions of earnings forecasts may be reduced in companies with outside directors.

ABSTRACT: This study examines properties of analysts' cash flow forecasts and compares them to those exhibited by analysts' earnings forecasts. Our results indicate that analysts' cash flow forecasts are less accurate than analysts' earnings forecasts and improve at a slower rate during the forecast period. Further, cash flow forecasts appear to be a nai¨ve extension of analysts' earnings forecasts, thus providing limited information on expected changes in working capital. We also find that analysts' forecasts of cash flows are of limited information content and are only weakly associated with stock returns. Finally, estimating expected accruals as the difference between analysts' earnings forecasts and their cash flow forecasts does not result in a better detection of earnings management than achieved by commonly used accrual models.

Customers are one of the key external stakeholders for a company. Using Chinese listed companies’ data from 2007 to 2015, this paper examines the impact of customer concentration on information disclosure from the perspective of management earnings forecast. Empirical results show that a more concentrated customer base induces companies to disclose more positive earnings forecast. In addition, the positive association between customer concentration and management earnings forecast is more pronounced with higher economic policy uncertainty. Further analyses reveal that companies issue more positive earnings forecast to reduce the financing risk and protect their relationship-specific investment. Also, customer concentration reduces the consistency of earnings forecast since the deviation of the forecast performance and the actual performance is greater. This paper enriches the literature on the determinants of management earnings forecast and the effects of stakeholders on corporate financial behaviour. Our findings also provide implications for investors, regulators, and various stakeholders to understand management earnings forecast decisions.

This study investigates whether the voluntary disclosure of management earnings forecasts is associated with investors' assessment of firm risk and firm value. We find a significant negative relationship between the issuance of management earnings forecasts and a variety of measures of firm risk (idiosyncratic risk, stock return volatility, beta, and bid-ask spreads). Considering specific features of the management earnings forecasts, we find more frequent, more precise and more accurate earnings forecasts are associated with a larger decrease in firm risk. Our results therefore suggest that information quality is an important determinant of both diversifiable risk and nondiversifiable systematic risk. We also demonstrate that management earnings forecasts are positively associated with firm value as captured by Tobin's Q. More frequent, precise and accurate forecasts further enhance valuation premiums. Finally, we partition our sample into good news versus bad news forecasts, and show that the results are driven more by good news forecasts. Overall, releasing high-quality management earnings forecasts is associated with important capital market benefits.

Directorss Career Concerns: Evidence from Proxy Contests and Board Interlocks

Credibility of Management Earnings Forecasts and Future Returns