Abstract
For investors, how to gain accurate and unbiased information about future earnings of an investee company is critical to demand a risk premium that is reflected in the expected rate of return. Management earnings forecasts are a major source of information about future earnings and are posited as especially important in the Japanese disclosure system. However, managers might face incentive bias toward opportunistic decisions on the forecast from a short-term view, as there is a conflict of interest between managers and investors about risk premium. The issue of how to mitigate such incentive bias is a key for disciplined pricing in the market by reducing information asymmetry. Management earnings forecasts definitely influence both the quality and quantity of information about future earnings. Responsible management forecasts are the core of the self-disciplining mechanism to provide more accurate and less biased information in the market.
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Notes
- 1.
The stock exchanges request listed firms to publicize condensed financial statements (Kessan Tanshin) immediately upon approval by the board of directors of a draft of financial statements and management earnings forecasts together with current financial results (Ota 2006).
- 2.
As of March 2016, 96.2% of Tokyo Stock Exchange (TSE)-listed companies disclosed fiscal-year management forecasts of performance with numeric values (Tokyo Stock Exchange 2016).
- 3.
The questionnaire was sent to all 3944 listed companies in February 2008. The total number of respondents is 1260 listed companies and the return rate is 31.9%.
- 4.
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Suto, M., Takehara, H. (2018). Corporate Social Responsibility Awareness and Management Forecast Bias. In: Corporate Social Responsibility and Corporate Finance in Japan. Advances in Japanese Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-8986-2_7
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