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Evidence That Management Earnings Forecasts Do Not Fully Incorporate Information in Prior Forecast Errors

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  • Weihong Xu

Abstract

This paper investigates whether managers fully incorporate the implications of their prior earnings forecast errors into their future earnings forecasts and, if not, whether this behavior is related to the post‐earnings announcement drift. I find a positive association in consecutive management forecast errors, suggesting that managers underestimate the future implications of past earnings information when forecasting earnings. I also find that managers underestimate the information in their prior forecast errors to a greater extent when they make earnings forecasts with a longer horizon. Finally, I find that, similar to managers, the market also underreacts to earnings information in management forecast errors, which leads to predictable stock returns following earnings announcements.

Suggested Citation

  • Weihong Xu, 2009. "Evidence That Management Earnings Forecasts Do Not Fully Incorporate Information in Prior Forecast Errors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7‐8), pages 822-837, September.
    • Handle: RePEc:bla:jbfnac:v:36:y:2009:i:7-8:p:822-837
    DOI: 10.1111/j.1468-5957.2009.02152.x
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    References listed on IDEAS

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    Cited by:

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    4. Stephen Baginski & Elizabeth Demers & Chong Wang & Julia Yu, 2016. "Contemporaneous verification of language: evidence from management earnings forecasts," Review of Accounting Studies, Springer, vol. 21(1), pages 165-197, March.
    5. Thorsten Knauer & Andreas Wömpener, 2011. "Management Forecast Regulation and Practice in Germany – Firm and Auditor Perspectives," Accounting in Europe, Taylor & Francis Journals, vol. 8(2), pages 185-209.
    6. Wei Chen & Lili Dai & Hun‐Tong Tan, 2023. "When does analyst reputation matter? Evidence from analysts’ reliance on management guidance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(7-8), pages 1305-1337, July.

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