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Optimistic bias in management forecasts by Japanese firms to avoid forecasting losses

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  • Cho, Myojung
  • Hah, Young D.
  • Kim, Oliver

Abstract

Listed firms in Japan are effectively compelled to report management forecasts of sales, ordinary income, and net income along with actual earnings and sales each year. Prior studies report that Japanese managers tend to announce optimistic forecasts of earnings. We show that a large part (61.6%) of the overall optimistic bias in management earnings forecasts in Japan can be explained by loss forecast avoiding behavior of a small fraction (5.25%) of firms. Such behavior is caused in part by the view of the main bank and power group that the management forecast of earnings is the manager's earnings target. Our findings suggest that the Japanese stock market recognizes such loss forecast avoidance and accordingly discounts new information in management forecasts.

Suggested Citation

  • Cho, Myojung & Hah, Young D. & Kim, Oliver, 2011. "Optimistic bias in management forecasts by Japanese firms to avoid forecasting losses," The International Journal of Accounting, Elsevier, vol. 46(1), pages 79-101, March.
  • Handle: RePEc:eee:accoun:v:46:y:2011:i:1:p:79-101
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    Cited by:

    1. Keishi Fujiyama & Makoto Kuroki, 2017. "Employee Downsizing and Accounting Choices: Evidence from Japan," Discussion Paper Series DP2017-06, Research Institute for Economics & Business Administration, Kobe University, revised Sep 2017.
    2. Müller, Hans Christian, 2011. "Forecast Errors in Undisclosed Management Sales Forecasts: The Disappearance of the Overoptimism Bias," DICE Discussion Papers 40, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Sébastien GALANTI & Anne-Gaël VAUBOURG, 2017. "Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?," LEO Working Papers / DR LEO 2493, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    4. 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.
    5. repec:eee:ecmode:v:67:y:2017:i:c:p:325-337 is not listed on IDEAS
    6. 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.
    7. Kitching, Karen & Mashruwala, Raj & Pevzner, Mikhail, 2016. "Culture and Cost Stickiness: A Cross-country Study," The International Journal of Accounting, Elsevier, vol. 51(3), pages 402-417.
    8. Sébastien Galanti & Anne-Gaël Vaubourg, 2017. "Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?," Working Papers hal-01724253, HAL.
    9. Shota Otomasa & Atsushi Shiiba & Akinobu Shuto, 2015. "Management Earnings Forecasts as a Performance Target in Executive Compensation Contracts," CARF F-Series CARF-F-368, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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