IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v22y2017i3d10.1007_s11142-017-9396-0.html
   My bibliography  Save this article

Risk-based forecasting and planning and management earnings forecasts

Author

Listed:
  • Christopher D. Ittner

    (University of Pennsylvania)

  • Jeremy Michels

    (University of Pennsylvania)

Abstract

This study examines the association between a firm’s internal information environment and the accuracy of its externally disclosed management earnings forecasts. Internally, firms use forecasts to plan for uncertain futures. The risk management literature argues that integrating risk-related information into forecasts and plans can improve a firm’s ability to forecast financial outcomes. We investigate whether this internal information manifests itself in the accuracy of external earnings guidance. Using detailed survey data and publicly disclosed management earnings forecasts from a sample of publicly traded U.S. companies, we find that more sophisticated risk-based forecasting and planning processes are associated with smaller earnings forecast errors and narrower forecast widths. These associations hold across a variety of different planning horizons (ranging from annual budgeting to long-term strategic planning), providing empirical support for the theoretical link between internal information quality and the quality of external disclosures.

Suggested Citation

  • Christopher D. Ittner & Jeremy Michels, 2017. "Risk-based forecasting and planning and management earnings forecasts," Review of Accounting Studies, Springer, vol. 22(3), pages 1005-1047, September.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9396-0
    DOI: 10.1007/s11142-017-9396-0
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-017-9396-0
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-017-9396-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ryan Baxter & Jean C. Bedard & Rani Hoitash & Ari Yezegel, 2013. "Enterprise Risk Management Program Quality: Determinants, Value Relevance, and the Financial Crisis," Contemporary Accounting Research, John Wiley & Sons, vol. 30(4), pages 1264-1295, December.
    2. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    3. Gallemore, John & Labro, Eva, 2015. "The importance of the internal information environment for tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 149-167.
    4. Mark H. Lang & Russell J. Lundholm, 2000. "Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?," Contemporary Accounting Research, John Wiley & Sons, vol. 17(4), pages 623-662, December.
    5. Gordon, Lawrence A. & Loeb, Martin P. & Tseng, Chih-Yang, 2009. "Enterprise risk management and firm performance: A contingency perspective," Journal of Accounting and Public Policy, Elsevier, vol. 28(4), pages 301-327, July.
    6. Brian W. Nocco & René M. Stulz, 2006. "Enterprise Risk Management: Theory and Practice," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 8-20, September.
    7. Larcker, David F. & Rusticus, Tjomme O., 2010. "On the use of instrumental variables in accounting research," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 186-205, April.
    8. Gavin Cassar & Joseph Gerakos, 2017. "Do risk management practices work? Evidence from hedge funds," Review of Accounting Studies, Springer, vol. 22(3), pages 1084-1121, September.
    9. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    10. Thomas Hemmer & Eva Labro, 2008. "On the Optimal Relation between the Properties of Managerial and Financial Reporting Systems," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 1209-1240, December.
    11. Gavin Cassar & Brian Gibson, 2008. "Budgets, Internal Reports, and Manager Forecast Accuracy," Contemporary Accounting Research, John Wiley & Sons, vol. 25(3), pages 707-738, September.
    12. Feng, Mei & Li, Chan & McVay, Sarah, 2009. "Internal control and management guidance," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 190-209, December.
    13. Power, Michael, 2009. "The risk management of nothing," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 849-855, August.
    14. Noe, Christopher F., 1999. "Voluntary disclosures and insider transactions," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 305-326, July.
    15. Makridakis, Spyros & Taleb, Nassim, 2009. "Decision making and planning under low levels of predictability," International Journal of Forecasting, Elsevier, vol. 25(4), pages 716-733, October.
    16. Zotteri, Giulio & Kalchschmidt, Matteo, 2007. "Forecasting practices: Empirical evidence and a framework for research," International Journal of Production Economics, Elsevier, vol. 108(1-2), pages 84-99, July.
    17. Ali, Ashiq & Klasa, Sandy & Yeung, Eric, 2014. "Industry concentration and corporate disclosure policy," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 240-264.
    18. Gordon, Lawrence A. & Loeb, Stephen E., 1982. "Accounting and public policy," Journal of Accounting and Public Policy, Elsevier, vol. 1(1), pages 1-3.
    19. Lawrence, Michael & Goodwin, Paul & O'Connor, Marcus & Onkal, Dilek, 2006. "Judgmental forecasting: A review of progress over the last 25 years," International Journal of Forecasting, Elsevier, vol. 22(3), pages 493-518.
    20. Lang, M & Lundholm, R, 1993. "Cross-Sectional Determinants Of Analyst Ratings Of Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 246-271.
    21. Bipin Ajinkya & Sanjeev Bhojraj & Partha Sengupta, 2005. "The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 343-376, June.
    22. Asher B. Curtis & Russell J. Lundholm & Sarah E. Mcvay, 2014. "Forecasting Sales: A Model and Some Evidence from the Retail Industry," Contemporary Accounting Research, John Wiley & Sons, vol. 31(2), pages 581-608, June.
    23. Robin M. Hogarth & Spyros Makridakis, 1981. "Forecasting and Planning: An Evaluation," Management Science, INFORMS, vol. 27(2), pages 115-138, February.
    24. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
    25. Danese, Pamela & Kalchschmidt, Matteo, 2011. "The impact of forecasting on companies' performance: Analysis in a multivariate setting," International Journal of Production Economics, Elsevier, vol. 133(1), pages 458-469, September.
    26. Robert E. Hoyt & Andre P. Liebenberg, 2011. "The Value of Enterprise Risk Management," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(4), pages 795-822, December.
    27. Jing Ai & Patrick L. Brockett & William W. Cooper & Linda L. Golden, 2012. "Enterprise Risk Management Through Strategic Allocation of Capital," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 29-56, March.
    28. Newman, P & Sansing, R, 1993. "Disclosure Policies With Multiple Users," Journal of Accounting Research, Wiley Blackwell, vol. 31(1), pages 92-112.
    29. Meissner, Philip & Wulf, Torsten, 2013. "Cognitive benefits of scenario planning: Its impact on biases and decision quality," Technological Forecasting and Social Change, Elsevier, vol. 80(4), pages 801-814.
    30. Dobler, Michael, 2008. "Incentives for risk reporting -- A discretionary disclosure and cheap talk approach," The International Journal of Accounting, Elsevier, vol. 43(2), pages 184-206.
    31. Yang, Holly I., 2012. "Capital market consequences of managers' voluntary disclosure styles," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 167-184.
    32. Nadine Gatzert & Michael Martin, 2015. "Determinants and Value of Enterprise Risk Management: Empirical Evidence From the Literature," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 18(1), pages 29-53, March.
    33. Andrew Ellul & Vijay Yerramilli, 2013. "Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies," Journal of Finance, American Finance Association, vol. 68(5), pages 1757-1803, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ruihao Ke & Meng Li & Zhejia Ling & Yuan Zhang, 2019. "Social Connections Within Executive Teams and Management Forecasts," Management Science, INFORMS, vol. 65(1), pages 439-457, January.
    2. Ivana Dvorski Lacković & Nataša Kurnoga & Danijela Miloš Sprčić, 2022. "Three-factor model of Enterprise Risk Management implementation: exploratory study of non-financial companies," Risk Management, Palgrave Macmillan, vol. 24(2), pages 101-122, June.
    3. Ferracuti, Elia & Stubben, Stephen R., 2019. "The role of financial reporting in resolving uncertainty about corporate investment opportunities," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    4. Ena Pecina & Danijela Miloš Sprčić & Ivana Dvorski Lacković, 2022. "Qualitative Analysis of Enterprise Risk Management Systems in the Largest European Electric Power Companies," Energies, MDPI, vol. 15(15), pages 1-19, July.
    5. Sehwa Kim & Seil Kim & Anya V. Kleymenova & Rongchen Li, 2023. "Current Expected Credit Losses (CECL) Standard and Banks' Information Production," Finance and Economics Discussion Series 2023-063, Board of Governors of the Federal Reserve System (U.S.).
    6. Osswald, Benjamin, 2018. "Corporate tax planning and firms' information environment," arqus Discussion Papers in Quantitative Tax Research 236, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Qiang Cheng & Young Jun Cho & Holly Yang, 2018. "Financial reporting changes and the internal information environment: Evidence from SFAS 142," Review of Accounting Studies, Springer, vol. 23(1), pages 347-383, March.
    8. Posch, Arthur, 2020. "Integrating risk into control system design: The complementarity between risk-focused results controls and risk-focused information sharing," Accounting, Organizations and Society, Elsevier, vol. 86(C).
    9. He, Jing & Lee, Dongyoung, 2023. "Say more to return less? Disclosure subsequent to successful technological innovation," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 403-426.
    10. Dane M. Christensen & Hengda Jin & Suhas A. Sridharan & Laura A. Wellman, 2022. "Hedging on the Hill: Does Political Hedging Reduce Firm Risk?," Management Science, INFORMS, vol. 68(6), pages 4356-4379, June.
    11. Roychowdhury, Sugata & Shroff, Nemit & Verdi, Rodrigo S., 2019. "The effects of financial reporting and disclosure on corporate investment: A review," Journal of Accounting and Economics, Elsevier, vol. 68(2).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Florio, Cristina & Leoni, Giulia, 2017. "Enterprise risk management and firm performance: The Italian case," The British Accounting Review, Elsevier, vol. 49(1), pages 56-74.
    2. José Ruiz-Canela López, 2021. "How Can Enterprise Risk Management Help in Evaluating the Operational Risks for a Telecommunications Company?," JRFM, MDPI, vol. 14(3), pages 1-26, March.
    3. Malik, Muhammad Farhan & Zaman, Mahbub & Buckby, Sherrena, 2020. "Enterprise risk management and firm performance: Role of the risk committee," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(1).
    4. Dongyoung Lee, 2017. "Corporate Social Responsibility and Management Forecast Accuracy," Journal of Business Ethics, Springer, vol. 140(2), pages 353-367, January.
    5. Barakat, Ahmed & Chernobai, Anna & Wahrenburg, Mark, 2014. "Information asymmetry around operational risk announcements," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 152-179.
    6. Chen, Yu-Lun & Chuang, Yi-Wei & Huang, Hong-Gia & Shih, Jhuan-Yu, 2020. "The value of implementing enterprise risk management: Evidence from Taiwan’s financial industry," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    7. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    8. Jia, Jing & Bradbury, Michael E., 2020. "Complying with best practice risk management committee guidance and performance," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    9. Alessandra Allini & Raffaela Casciello & Marco Maffei & Martina Prisco, 2022. "The national culture as a determinant of ERM quality: Empirical evidence in the European banking context," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2022(1), pages 79-102.
    10. Naciye Sekerci & Don Pagach, 2020. "Firm Ownership and Enterprise Risk Management Implementation: Evidence from the Nordic Region," JRFM, MDPI, vol. 13(9), pages 1-21, September.
    11. Therese R. Viscelli & Mark S. Beasley & Dana R. Hermanson, 2016. "Research Insights About Risk Governance," SAGE Open, , vol. 6(4), pages 21582440166, November.
    12. Rami Shaheen & Mehmet Ağa & Husam Rjoub & Ahmad Abualrub, 2020. "Investigation of the Pillars of Sustainability Risk Management as an Extension of Enterprise Risk Management on Palestinian Insurance Firms’ Profitability," Sustainability, MDPI, vol. 12(11), pages 1-20, June.
    13. Imhof, Michael J & Seavey, Scott E., 2018. "How investors value cash and cash flows when managers commit to providing earnings forecasts," Advances in accounting, Elsevier, vol. 41(C), pages 74-87.
    14. Danijela Miloš Sprèiæ Antonija Kožul Ena Pecina, 2017. "Managers’ Support – A Key Driver behind Enterprise Risk Management Maturity," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 20(SCI), pages 25-39, April.
    15. Heitzman, Shane & Wasley, Charles & Zimmerman, Jerold, 2010. "The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 109-132, February.
    16. Mónica Hernández-Madrigal & Cristina Aibar-Guzmán & Beatriz Aibar-Guzmán & Élfego Ramírez-Flores, 2020. "Are external pressures always behind ERM implementation? Evidence from Spanish listed firms," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 17(2), pages 86-100, September.
    17. Al-Amri, Khalid & Davydov, Yevgeniy, 2016. "Testing the effectiveness of ERM: Evidence from operational losses," Journal of Economics and Business, Elsevier, vol. 87(C), pages 70-82.
    18. Elisabetta Mafrolla & Felice Matozza, 2014. "Risk management and firm size: a survey of Italian private companies," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2014(3), pages 87-108.
    19. de La Bruslerie, Hubert & Gabteni, Heger, 2014. "Voluntary disclosure of financial information by French firms: Does the introduction of IFRS matter?," Advances in accounting, Elsevier, vol. 30(2), pages 367-380.
    20. Ning Jia, 2019. "Corporate innovation strategy and disclosure policy," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 253-288, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9396-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.