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Analysts' awareness of systematic bias in management earnings forecasts

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  • Koji Ota

Abstract

The effectively mandatory provision of management forecasts of earnings is a unique feature of Japan's financial disclosure system. The first objective of this study is to identify the determinants of systematic bias in management forecasts using a sample of more than 36 000 one-year-ahead earnings forecasts announced by Japanese firms at the beginning of a fiscal year over the period 1979 to 2005. The examination of ex post management forecast errors shows that financial distress, firm growth, firm size and prior forecast errors are all associated with bias in management forecasts. The second objective of this study is to investigate whether analysts are aware of these factors that are found to be related to systematic bias in management earnings forecasts. The examination of analysts' forecasts issued subsequent to the announcement of management forecasts reveals that analysts take account of these factors when they issue their own earnings forecasts. The overall findings suggest that analysts are to some extent aware of the determinants of systematic bias in management forecasts.

Suggested Citation

  • Koji Ota, 2011. "Analysts' awareness of systematic bias in management earnings forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 21(18), pages 1317-1330.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:18:p:1317-1330
    DOI: 10.1080/09603107.2011.570713
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    Citations

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    Cited by:

    1. Kitagawa, Norio & Okuda, Shin’ya, 2016. "Management Forecasts, Idiosyncratic Risk, and the Information Environment," The International Journal of Accounting, Elsevier, vol. 51(4), pages 487-503.
    2. Kitagawa, Norio, 2021. "Macroeconomic uncertainty and management forecast accuracy," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(3).
    3. Wu, Yanran & Liu, Tingting & Han, Liyan & Yin, Libo, 2018. "Optimistic bias of analysts' earnings forecasts: Does investor sentiment matter in China?," Pacific-Basin Finance Journal, Elsevier, vol. 49(C), pages 147-163.
    4. Norio Kitagawa & Shin' ya Okuda, 2013. "Management Forecasts, Idiosyncratic Risk, and Information Environment," Discussion Papers 2013-38, Kobe University, Graduate School of Business Administration, revised Jul 2013.
    5. Iwasaki, Takuya & Kitagawa, Norio & Shuto, Akinobu, 2023. "Managerial discretion over initial earnings forecasts," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    6. Wenjun Kuang, 2023. "Accounting comparability and the accuracy of management earnings forecasts in Japan," Discussion Papers in Economics and Business 23-07, Osaka University, Graduate School of Economics.
    7. Takuya Iwasaki & Norio Kitagawa & Akinobu Shuto, 2012. "Managerial discretion over initial earnings forecasts “Forthcoming in Pacific-Basin Finance Journalâ€," CARF F-Series CARF-F-369, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Nov 2022.
    8. SUZUKI, Tomohiro & TAKASU, Yusuke, 2013. "Does Management Forecast Drive Growth of the Firm?," Working Paper Series 172, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
    9. Sakawa, Hideaki & Watanabel, Naoki & Gu, Junjian, 2022. "Internationalization and the reliance of analyst forecasts in stakeholder-oriented corporate governance: Evidence from Japanese MNEs," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    10. Takuya Iwasaki & Norio Kitagawa & Akinobu Shuto, 2013. "Managerial Discretion over Their Initial Earnings Forecasts," Discussion Paper Series DP2013-31, Research Institute for Economics & Business Administration, Kobe University.

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