Management Forecasts in Japan: An Empirical Study of Forecasts that Are Effectively Mandated

Abstract

We study management forecasts in Japan, where forecasts are effectively mandated but managers have considerable latitude over the numbers they release. We find that managers' initial earnings forecasts for a fiscal year are systematically upward-biased but that they revise their forecasts downward during the fiscal year so that most earnings surprises are non-negative. Managers' initial forecast optimism is inversely related to firm performance, and is more pronounced for firms with higher levels of insider ownership, smaller firms, and firms with a history of forecast optimism. The fact that managers' forecasts tend to be consistently optimistic suggests that reputation effects are insufficient to ensure managerial forecast accuracy. We also find that the information content of managers' forecasts is related to proxies for whether market participants view the forecasts as credible.

The joint effects of materiality thresholds and voluntary disclosure incentives on firms’ disclosure decisions

“…While their sample might contain MFs disclosed for materiality reasons, this does not confound their tests or inferences. Other papers of a similar vein include: McNichols (1989), Williams (1996), Skinner (1997), Price (1999), Noe (1999), Hutton et al (2003), Ng et al (2007), Pevzner (2007), Hutton and Stocken (2009), and Kato et al (2009).…”

The Information Content of Corporate Pension Funding Status in Japan

“…Kato et al (2009) note that these management forecasts are 'effectively mandatory' for publicly-listed firms in Japan. In fact, 99.8% of firm years in our sample have management forecasts.…”

Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?

“…In France, rules governing commission-sharing agreements (CSAs) were implemented by the Autorité des Marchés Financiers (AMF, the French Financial Markets Authority) in May 2007. In contrast to the GS, which addresses the conflicts of interest between financial research 1 A persistent optimism bias has also been observed in management forecasts by Japanese firms (Kato et al, 2009, Cho et al, 2011.…”