Do Management Forecasts Drive Firms’ Growth?

• In Event: Management Forecasts

Abstract

This study analyzes the relationship between ex ante high goals set by managers and ex post growth of their firms. We develop our hypothesis based on knowledge from goal-setting theory and over-extension strategy and test the hypothesis that firms continuously issuing aggressive management forecasts in ex ante periods grow at higher rates in ex post periods than those issuing non-aggressive management forecasts. From our analyses, we find ex ante management forecast innovation (MFI) is positively related to ex post firm growth after controlling for the endogeneity of MFI via regression based adjustment and propensity score matching. In particular, firms that continuously issue aggressive management forecasts achieve higher growth of earnings and stock prices in the future than do firms with similar fundamentals, except non-aggressive management forecasts. Recently, managerial myopia associated with management forecast disclosure has received increased global attention. However, based on the findings in prior literature, we find a lack of consistent support for a relationship between management forecast disclosure and managerial myopia. Especially in Japan, where management forecasts are effectively mandated, this study suggests there is a possibility that managers could prompt accumulation of intangible assets and achieve sustained growth of the firms by efficiently utilizing management forecasts. In other words, we indicate that management forecast disclosures issued by such a manager might have the potential to encourage “long-termism” of management.

Authors

• Tomohiro Suzuki, Asia University

• Yusuke Takasu, Hitotsubashi University