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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.
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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.


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Materials provided by University at Buffalo. Note: Content may be edited for style 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

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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 March 28, 2024 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 March 28, 2024).

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