Profit Forecasts

Abstract

This chapter argues against the idea that accuracy should be the main determinant of the effectiveness of profit forecasting. The concern with measuring the effectiveness of this type of activist forecast solely in terms of accuracy has been mentioned elsewhere. A company might forecast a loss of $1m, but by hard work, reorganization and a change in procedures turn the predicted loss into, say, $1m profit. With hindsight, the forecast has turned out to be very wrong. To say the forecast was a waste of time because it was badly inaccurate would be absurd. A better measure of the effectiveness of a forecast is how much it altered the decision making. Apart from bankruptcy (see the previous chapter) and disclosure (see next chapter), the accounting literature on profit forecasting seems dominated by the accuracy, rather than the agent for change, issues. This chapter argues against the overconcentration on accuracy by highlighting how little this type of research has achieved.