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Forecast Errors in Undisclosed Management Sales Forecasts: The Disappearance of the Overoptimism Bias

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  • Müller, Hans Christian

Abstract

Previous empirical evidence which evaluated the accuracy of management earnings or sales forecasts consistently revealed these forecasts to be on average signi cantly overoptimistic. However, all studies analyzed forecasts from public disclosures, which are an important signal to investors and analysts and thus possibly biased by strategic considerations. To disentagle whether and to which extent strategic deception or cognitive biases are resposible for this overoptimism, the present study analyzes the accuracy of 6,234 undisclosed, company-internal sales forecasts, which German firms provided anonymously to the IAB Establishment Panel. Quite surprisingly, the study reveals the average forecast to be signi cantly overpessimistic. I propose that the non-existence of a general bias towards overoptimism is due to the lack of incentives to consciously overgloss future prospects in undisclosed forecasts and that overpessimism may be a consequence of loss aversion.

Suggested Citation

  • 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).
  • Handle: RePEc:zbw:dicedp:40
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    File URL: https://www.econstor.eu/bitstream/10419/54195/1/040_Mueller.pdf
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    References listed on IDEAS

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    1. Brad M. Barber & Terrance Odean, 2001. "Boys will be Boys: Gender, Overconfidence, and Common Stock Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 261-292.
    2. repec:bla:joares:v:37:y:1999:i:1:p:57-81 is not listed on IDEAS
    3. 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.
    4. Klaus Abberger & Manuel Birnbrich & Christian Seiler, 2009. "Der »Test des Tests« im Handel - eine Metaumfrage zum ifo Konjunkturtest," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 62(21), pages 34-41, November.
    5. Brown, Philip & Clarke, Alex & How, Janice C. Y. & Lim, Kadir, 2000. "The accuracy of management dividend forecasts in Australia," Pacific-Basin Finance Journal, Elsevier, pages 309-331.
    6. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, pages 306-318.
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    Cited by:

    1. Stühmeier Torben & Wenzel Tobias, 2012. "Regulating Advertising in the Presence of Public Service Broadcasting," Review of Network Economics, De Gruyter, pages 1-23.
    2. Stühmeier Torben & Wenzel Tobias, 2012. "Regulating Advertising in the Presence of Public Service Broadcasting," Review of Network Economics, De Gruyter, pages 1-23.

    More about this item

    Keywords

    Management forecasts; Overoptimism; Overpessimism; Germany;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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