Managerial earnings forecasts bias and managers' decision to issue earnings guidance: An examination of management incentives.

摘要

This study investigates determinants of management forecast bias, and their links to management's decision to issue earnings guidance. More specifically, the study examines nine incentive factors that are likely to intensify managers' tendency to bias their earnings forecasts. In addition, the study explores how management's decision to issue guidance of annual earnings is linked to the incentive factors. Because the sample of management forecasts does not represent a random sample, the relations between the incentive factors and management forecast bias are also examined after controlling for managers' decision to issue earnings guidance, using the Heckman two-step approach.; Since biasing earnings forecasts can affect market participants' beliefs only until the release of the corresponding actual earnings, the study examines management's actions and other events during this window when the forecast is outstanding. Specifically, the incentive factors examined are: (1) insider trading activities; (2) stock issue; (3) stock repurchase; (4) stock acquisitions; (5) stock option grants; (6) realizable stock-based incentives; (7) unrealizable (long-term) stock-based incentives; (8) simultaneous release of earnings announcements; and (9) simultaneous release of short-term forecasts of quarterly earnings.; I find that management optimistic bias is significantly and positively associated with insiders' sales, stock issuances, stock acquisitions, and realizable stock-based incentives. Furthermore, management forecast bias is significantly and negatively associated with stock option grants and simultaneous earnings news. I also find that the likelihood of issuing guidance of annual earnings is positively and significantly associated with insiders' net purchases, stock issuances, and stock repurchases; and that this likelihood is negatively and significantly associated with stock option grants, and stock-based incentives. Finally, the empirical evidence suggests that the more extreme the simultaneously released earnings announcement news, the higher the likelihood of observing guidance of annual earnings.