Is There a Link between Choice of Management’s Forecast Precision and Management’s Intentions to Use Irregularities?

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Abstract

Abstract
In this study, we examine the precision in management forecasts of firms with subsequent findings of a reporting irregularity (a potentially intentional misstatement) to determine if there is a pattern between forecast precision and reporting irregularities. In our analyses, we compare the precision of management forecasts that have a subsequent reporting irregularity with the management forecast precision of firms without irregularities or restatements in the period for which earnings are restated (the restatement period). We contend that firms with subsequent reporting irregularities either chose the forecast precision anticipating that they would be aggressive in their financial reporting or were forced to be aggressive in their financial reporting once they had chosen their forecast precision and determined they would need to be aggressive in order to meet or beat their more precise forecast. Accordingly, we hypothesize that the earnings forecasts of firms with a reporting irregularity exhibit greater precision in their management earnings forecasts. Consistent with this hypothesis, we find that firms with a reporting irregularity are associated with a higher probability of having issued a point (more precise) forecast or a smaller range (higher precision) if they had issued a range forecast.

Authors

• Yu-Ho Chi, University of North Carolina-Pembroke

• David A Ziebart, University of Kentucky