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Serial Correlation in Management Earnings Forecast Errors

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  • GUOJIN GONG
  • LAURA Y. LI
  • JEFF J. WANG

Abstract

We examine whether management earnings forecast errors exhibit serial correlation and how analysts understand the serial correlation property of management forecast errors (MFEs). MFEs should not exhibit serial correlation if managers efficiently process information in prior forecast errors and truthfully convey their earnings expectations through management forecasts. However, for long‐horizon management forecasts of annual earnings, we find significantly positive serial correlation in MFEs, and sample self‐selection does not seem to drive this phenomenon. Further analyses suggest that managers’ unintentional information processing bias contributes to this positive serial correlation. Analysts anticipate the intertemporal persistence of MFEs but underestimate the persistence level when reacting to management forecasts. Our findings have implications for market participants who rely on management forecasts to form earnings expectations, and also shed light on the efficiency of managerial decision making.

Suggested Citation

  • Guojin Gong & Laura Y. Li & Jeff J. Wang, 2011. "Serial Correlation in Management Earnings Forecast Errors," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 677-720, June.
  • Handle: RePEc:bla:joares:v:49:y:2011:i:3:p:677-720
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    File URL: https://doi.org/10.1111/j.1475-679X.2011.00407.x
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    Cited by:

    1. Norio Kitagawa & Shin' ya Okuda, 2013. "Management Forecasts, Idiosyncratic Risk, and Information Environment," Discussion Papers 2013-38, Kobe University, Graduate School of Business Administration, revised Jul 2013.
    2. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-018-9441-7 is not listed on IDEAS
    3. SUZUKI, Tomohiro & TAKASU, Yusuke, 2013. "Does Management Forecast Drive Growth of the Firm?," Working Paper Series 172, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
    4. Kitagawa, Norio & Okuda, Shin’ya, 2016. "Management Forecasts, Idiosyncratic Risk, and the Information Environment," The International Journal of Accounting, Elsevier, vol. 51(4), pages 487-503.
    5. repec:eee:jocaae:v:13:y:2017:i:2:p:119-133 is not listed on IDEAS
    6. Dongyoung Lee, 2017. "Corporate Social Responsibility and Management Forecast Accuracy," Journal of Business Ethics, Springer, vol. 140(2), pages 353-367, January.
    7. Hilary, Gilles & Hsu, Charles & Segal, Benjamin & Wang, Rencheng, 2016. "The bright side of managerial over-optimism," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 46-64.
    8. repec:eee:riibaf:v:46:y:2018:i:c:p:201-210 is not listed on IDEAS
    9. Tang, Michael & Zarowin, Paul & Zhang, Li, 2015. "How do analysts interpret management range forecasts?," Accounting, Organizations and Society, Elsevier, vol. 42(C), pages 48-66.

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