Relationship between Accuracy of Managers’ Earnings Forecasts and Senior Managers’ Turning

Document Type : Research Paper

Authors

Abstract

The predictions provided by the executives about company’s future profitability contain potentially valuable concepts that help investors to make optimal decisions. Like any other information, the value of this prediction depends on its accuracy and credibility in investors’ point of view. The main objective of this study was to investigate the relationship between the accuracy of managers’ earnings forecasts and senior managers’ turning. In theories, it is expected that shareholders support the managers that have more accurate and informative predictions. Having this objective, the data of 81 firms for a 5-year-period, were collected. A multivariate panel regression model is used to test the research hypotheses.
The results showed that there exists a negative significant relationship between the accuracy of managers’ earnings forecasts and senior managers turning. In other words, in the Iranian companies, managers with more realistic and accurate predictions for future profit, were considered able managers and were accepted to hold their managing positions by investors. In the second hypothesis, the companies divided into two groups of firms with good performance and firms with poor performance. The findings from testing the hypothesis indicated that in the firms with poor performance, there was a positive and stronger relationship between the accuracy in prediction of absolute performance by the managers and changing director managers, compared with the firms with good performance. In other words, when companies’ performance is satisfactory, supporting the managers with less accurate earnings forecasts could be expected more.

Keywords

References

Ajinkya, B., Bhojraj, S. and Sengupta, P. (2005). The association between outside directors, institutional investors and the properties of management earnings forecasts. Journal of Accounting Research, 43, 343–376. 
Barzideh, F., Boolo, G. and Amini Motlagh, A. (2010). The relationship between the quality of earnings predictions and earnings response coefficient and the ownership’s centralization in companies listed in Tehran Stock Exchange, Journal of Accounting Studies, 27, 101-118 [In Persian].
Bushman, R.M., and Smith, A.J. (2010). Financial accounting information and corporate governance. Journal of Accounting and Economics, 32(1-3): 237–333.
Cheng, Q., and Lo, K. (2006). Insider trading and voluntary disclosures. Journal of Accounting Research, 44, 815–848.
Coller, M., and Yohn, T.L. (1997). Management forecasts and information asymmetry: An examination of bid-ask spreads. Journal of Accounting Research, 35, 181–191.
Cotter, J., Tuna, I. and Wysocki, P. (2006). Expectations management and beatable targets: How do analysts react to explicit earnings guidance?, Contemporary Accounting Research, 23, 593–624.
Eisfeldt, A.L., and Kuhnen, C.M. (2013). CEO turnover in a competitive assignment framework, Journal of Financial Economics, 109, 351–372.   
Field, L., Lowry, M. and Shu, S. (2005). Does Disclosure deter or trigger litigation. Journal of Accounting & Economics, 39, 487–507.
Firth, S., and Smith, A. (1992). The accuracy of profits forecasts in initial public offerings prospectuses. Accounting and Business Research, 22, 239-347. 
Forooghi, D. and Safdarian, L., (2012). The relationship between earnings management, earnings forecast error and abnormal return of accepted firms in Tehran Stock Exchange, Journal of Experimental Study of Financial Accounting, 33, 1-17 [In Persian].
Frankel, R., McNichols, M. and Wilson, G. (1995). Discretionary disclosure and external financing. The Accounting Review, 70, 135–150.
Gounopoulos, D. (2004). Accuracy of management earnings forecasts in IPO prosp-ectuses: Evidence from Athens Stock Exchange. Working Paper, University of Surrey: United Kingdom.
Hui, K.W., Matsunaga, S.R. and Morse D. (2009). the Impact of conservatism on mmanagement quantitative earnings forecasts. Journal of Accounting & Economics, 47, 192–207.
Izadinia, N., Tayebi, S. K. and Kashef, A.A. (2012). Determining ability of operating income and Its changes in explaining and predicting operating income and stock returns: the case of Tehran Stock Exchange, Journal of Accounting Knowledge, 3(9), 7-32 [In Persian].
Jayaraman, S., and Milbourn, T.T. (2012). The role of stock liquidity in executive compensation. Accounting Review. 87, 537-563.
Karamanou, I., and Vafeas, N. (2005). The association between corporate boards, audit committees, and management earnings forecasts: an empirical analysis. Journal of Accounting and Economics, 43, 453–486.
Khalifehsoltani, S.A., Mollanazari, M. and Delpak, S. (2010). The relationship between management earnings forecast errors and accruals, Journal of Accounting Knowledge, 1(3), 59-76 [In Persian].
Kordestani, G. and Ashtab, A., (2010). The examine relation between earnings forecast error and Stock abnormal return of new entrants accepted firms in Tehran Stock Exchange, Journal of Accounting and Auditing Review, 60, 93-108 [In Persian].  
Lee, S., Matsunaga, S.R. and Park, C.W. (2012). Management forecast accuracy and CEO turnover. Accounting Review, 87, 2095–2122.
Lennox, C., and Park, C.W. (2006). The informativeness of earnings and management’s issuance of earnings forecasts. Journal of Accounting & Economics, 42, 439–458.
Malekiyan, A., Ahmadpour, A., Rahmani N.M. and Daryaei A.A. (2010). The effective factors on accuracy of forecasted earning evidence from Tehran Stock Exchange, Journal of Accounting and Auditing Review, 61, 23-38 [In Persian].
Mashayekh, S. and Shahrokhi, S. (2007). The examine predict of earning forecast by management and influence factors on this forecaste, Journal of Accounting and Auditing Review, 50, 65-82 [In Persian].
Matsumoto, D.A. (2002). Management’s incentives to avoid negative earnings surprises. Accounting Review, 77, 483–514.
McNichols, M., and O’Brien, P.C. (1997). Self-Selection and analyst coverage. Journal of Accounting Research, 35, 167–199.
Mehrani, S. and Hesarzadeh, R. (2011). Earnings volatility and possible to predict it, Journal of Accounting Knowledge, Issue 2(6), 27-42 [In Persian].
Mergenthaler, R.D., Rajgopal, S. and Srinivasan, S. (2011). CEO and CFO career penalties to missing quarterly analysts forecasts. Working paper, Emory University.
Namazi, M. and Shamsedini, K. (2008). The examine of factors on the accuracy of earnings forecasts by management of accepted firms in Tehran Stock Exchange, Journal of Development and Investment, 1, 1-25 [In Persian].
Razmian, F. and Hoshi, A. (2014). The effect of CEO the content information and earnings quality of accepted firms in Tehran Stock Exchange, Journal of Accounting Knowledge, 4(13), 105-127 [In Persian].
Richardson, S., Teoh, S.W. and Wysocki, P. D. (2004). The walk-down to beatable analyst forecasts: the role of equity issuance and insider trading incentives. Contemporary Accounting Research, 21, 885–924.
Rogers, J., and Buskirk, A.V. (2009). Shareholder litigation and changes in disclosure behavior. Journal of Accounting & Economics, 47, 136–156.
Trueman, B. (1986). Why do managers voluntarily release earnings forecasts? Journal of Accounting & Economics, 8, 53–71.
Warner, J., Watts, J. and Wruck, K. (1988). Stock prices and top management changes. Journal of Financial & Economics, 20, 461–492.
Zamora, V. (2009). Do managers benefit from superior forecasting? Working Paper, Seattle University.

Files

History

  • Receive Date: 09 May 2014
  • Revise Date: 21 January 2015
  • Accept Date: 20 February 2015

Share

How to cite

Statistics