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Analysts' Awareness of Systematic Bias in Management Earnings Forecasts: Empirical Evidence from Japan
Koji Ota,
University Of Hyogo
ABSTRACT. The effectively mandatory provision of management earnings forecasts (MEF) is an unique feature of Japan's financial disclosure system. The first objective of this study is to identify the determinants of systematic bias in MEF. 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 MEF. The second objective of this study is to investigate whether analysts are aware of these factors that are related to systematic bias in MEF. The examination of analysts' forecasts issued subsequent to the announcement of management forecasts reveals that analysts take these factors into consideration when they issue their own earnings forecasts. These findings indicate that analysts are well aware of the determinants of systematic bias in MEF and make correct adjustments that lead to the higher accuracy of analysts' forecasts than management forecasts.
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