This paper examines the hypothesis that when disappointing information regarding a firm's performance is released, the firm's management faces particularly strong incentives to counter the disappointing news with overly optimistic forward-looking statements. To address this issue, the paper investigates the bias in management forecasts of annual earnings released concurrently with earnings announcements or with an additional shorter-horizon forecast of quarterly earnings. The paper predicts and finds that the more disappointing the earnings announcement news, the higher the optimistic bias in the concurrently released long-horizon forecasts of annual earnings. Because managers may use shorthorizon forecasts of quarterly earnings to preempt disappointing earnings announcements, the paper also examines the interplay between management short-horizon forecasts of quarterly earnings and longhorizon forecasts of annual earnings that are released simultaneously. The paper documents a significantly negative association between the news contained in the short-horizon forecasts of quarterly earnings and the optimistic bias in the accompanying long-horizon forecast of annual earnings. Finally, using market reaction tests, the paper documents that market participants are aware, at least to some extent, of management's tendency to counter disappointing earnings news with overly optimistic forecasts.
| Speaker: | Dr Yoel BENILUZ Assistant Professor, Rutgers University |
| When: |
2.00 pm - 3.30 pm |
| Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |