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An International Meeting of American Accounting
Association
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Determinants of the Bias, Accuracy and Precision of Management Earnings Forecasts |
Andrew A. Anabila
Pace University
Abstract: The safe harbor provisions have increased in recent years following the Private Securities Litigation Reform Act (PSLRA) of 1996 and the Securities Litigation Uniform Standards Act (SLUSA) of 1998. However, a number of firms like Coca Cola and Gillette have moved to abandon quantitative earnings forecasts, due to concern over the markets’ response when they miss their forecasts. This study examines if, and why, management forecasts are systematically biased and inaccurate. I show that the forecasts are optimistic on average, and the optimism increases in the forecast horizon (remoteness from the end of the fiscal period). Specific firm attributes explain the bias and accuracy as follows. Complexity of business operations is positively related to optimism bias. External and internal corporate governance put pressure on management to be optimistic. Firm performance (ROE), size and the number of management forecasts issued are positively related to pessimism bias.