Title

Managerial Incentives and Management Forecast Precision

Publication Type

Journal Article

Publication Date

4-2013

Abstract

Managers have great discretion in determining forecast characteristics, but little is known about how managerial incentives affect these characteristics. This paper examines whether managers strategically choose forecast precision for self-serving purposes. Building on the prior finding that the market reaction to vague forecasts is weaker than its reaction to precise forecasts, we find that for management forecasts disclosed before insider sales, more positive (negative) news forecasts are more (less) precise than other management forecasts. The opposite applies to management forecasts disclosed before insider purchases. These results are consistent with managers strategically choosing forecast precision to increase stock prices before insider sales and to decrease stock prices before insider purchases. Additional analyses indicate that the impact of managerial incentives on forecast precision is less pronounced when institutional ownership is high or when disclosure risk is high, and is more pronounced when investors have difficulty in assessing the precision of managers' information.

Keywords

management forecast, managerial incentives, insider trading, forecast precision

Discipline

Accounting

Research Areas

Financial Performance Analysis

Publication

Accounting Review

Volume

88

Issue

5

First Page

1575

Last Page

1602

ISSN

0001-4826

Identifier

10.2308/accr-50506

Publisher

American Accounting Association