The Effects of Organizational Structure on Management Earnings Forecast: Evidence from U.S. Multinational Firms

• In Event: Earnings Forecasts: International Evidence

Abstract

Using a sample of U.S. multinational firms, we examine the effects of vertical versus horizontal organizational structure on management earnings forecast. For vertical firms, information from individual foreign product markets needs to travel through multiple layers of area management to reach the general manager. Such information delivery process can result in the loss and delay of information critical for the general manager’s understanding of firm performance. Consequently, the compromised internal information environment in vertical firms would negatively affect the accuracy and timelines of management earnings forecast. We provide evidence that vertical firms’ management earnings forecasts are less accurate and less timely than horizontal firms’. In addition, we find that financial analysts react less strongly to the news in vertical firms’ management forecasts. Our results are robust in a battery of robustness tests. Our study suggests that organizational structure plays an important role in shaping firms’ financial disclosures to external stakeholders.

Authors

• Yun Fan, University of Houston

• Mark (Shuai) Ma, American University