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Implications Of Past Forecasting Errors Often Underestimated

Date:
November 11, 2009
Source:
University at Buffalo
Summary:
When managers issue a forecast of their firm's earnings, they do not always take into account prior forecasting errors, according to new research.

When managers issue a forecast of their firm's earnings, they do not always take into account prior forecasting errors, according to research in the current issue of the Journal of Business Finance & Accounting.

Weihong Xu, assistant professor of accounting in the University at Buffalo School of Management, analyzed more than 11,000 firm-quarter observations. She found that managers often underestimate the implications of their past forecasting errors when forecasting earnings.

This underestimation of past errors can affect how the market responds to a new earnings forecast. Specifically, it can contribute to "post-earnings announcement drift;" that is, stock prices continue to drift in the direction of the initial price response to an earnings announcement.

"Managers underestimate the information in their prior forecast errors to a greater extent when they make earnings forecasts with a longer horizon," Xu says.

She notes that further study is needed to see if the underestimation is intentional on the part of management in order to provide biased forecasts.


Story Source:

The above story is based on materials provided by University at Buffalo. Note: Materials may be edited for content and length.


Journal Reference:

  1. Weihong Xu. Evidence That Management Earnings Forecasts Do Not Fully Incorporate Information in Prior Forecast Errors. Journal of Business Finance & Accounting, 2009; 36 (7-8): 822 DOI: 10.1111/j.1468-5957.2009.02152.x

Cite This Page:

University at Buffalo. "Implications Of Past Forecasting Errors Often Underestimated." ScienceDaily. ScienceDaily, 11 November 2009. <www.sciencedaily.com/releases/2009/11/091110112444.htm>.
University at Buffalo. (2009, November 11). Implications Of Past Forecasting Errors Often Underestimated. ScienceDaily. Retrieved April 19, 2014 from www.sciencedaily.com/releases/2009/11/091110112444.htm
University at Buffalo. "Implications Of Past Forecasting Errors Often Underestimated." ScienceDaily. www.sciencedaily.com/releases/2009/11/091110112444.htm (accessed April 19, 2014).

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