American Accounting Association

AUGUST 6-10, 2011  •  DENVER, COLORADO

Session Title: Management Forecasts I
Presentation Date: Wednesday August 10, 2011
Presentation Time: 4:00 pm-5:30 pm

Do Managers Always Know Better? An Examination of the Relative Accuracy of Management and Analyst Forecasts

Amy P. Hutton, Boston College
Lian Fen Lee, Boston College
Susan Shu, Boston College

ABSTRACT: In this paper we examine the relative accuracy of management and analyst forecasts. We predict and find that analysts’ information advantage resides at the macroeconomic level. They provide more accurate long-horizon earnings forecast than management when a firm’s fortunes move in concert with macroeconomic factors such as gross domestic product and energy costs. In contrast, we expect and find that management’s information advantage resides at the firm level. Their forecasts are more accurate than analysts when management’s actions, which affect reported earnings, are difficult to anticipate by outsiders. Examples include when the firm’s inventories are abnormally high, the firm has excess capacity, or is experiencing a loss. Interestingly, while analysts are commonly viewed as industry specialists, neither managers nor analysts have a forecasting advantage for firms with revenues that are more synchronous with their industries’ revenues

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