Management Incentives to Publish Aggressive or Conservative Earnings Forecasts and Disclosure Policy Change

This study illustrates some of the motives and incentives of managers who make aggressive/conservative forecasts and examines the circumstances in which managers revise their forecasting strategies. We observe that companies under which managers reap the benefits of high stock prices in their remuneration, distressed companies, companies that operate under strong stock market pressure, and companies that plan to raise funds from stockholders during the forecasted fiscal year all tend to issue aggressive forecasts, whereas companies that operate under strong pressure from creditors tend to publish conservative forecasts. This study shows that, when the management is being replaced, companies that reported an ordinary profit in the previous fiscal year by the predecessor reduce the aggressiveness of their forecasts, whereas those that reported an ordinary loss report aggressive forecasts. In addition, companies that reported a large positive forecast error in the previous fiscal year issue less aggressive forecasts, whereas companies that reported a large negative forecast error issue aggressive forecasts.