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Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies

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Listed:
  • Christopher S. Armstrong

    (Stanford University)

  • Antonio Dávila

    (Universidad de Navarra)

  • George Foster

    (Stanford University)

  • John R. M. Hand

    (Kenan-Flagler Business School)

Abstract

This paper studies the properties and determinants of managers’ multi-year financial forecasts. Using one- to five-year-ahead forecasts reported by private venture-backed firms, we ask whether, by how much, and why biases in managers’ forecasts of revenues, expenses and profits depend on the forecasting horizon and the verifiability of assets. We find that profitability forecasts contain a strategic component, in that [1] one-year-ahead revenue (expense) forecasts are slightly and asymmetrically pessimistic (optimistic), while five-year-ahead forecasts are hugely and asymmetrically optimistic (pessimistic); and [2] biases in revenue and expense forecasts are larger, the harder to verify or more intangible-intensive are firms’ assets.

Suggested Citation

  • Christopher S. Armstrong & Antonio Dávila & George Foster & John R. M. Hand, 2007. "Biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies," Review of Accounting Studies, Springer, vol. 12(2), pages 183-215, September.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:2:d:10.1007_s11142-007-9033-4
    DOI: 10.1007/s11142-007-9033-4
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