Optimistic bias in management forecasts by Japanese firms to avoid forecasting losses

Myojung Cho, Young Hah, Oliver Kim

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Listed firms in Japan are effectively compelled to report management forecasts of sales, ordinary income, and net income along with actual earnings and sales each year. Prior studies report that Japanese managers tend to announce optimistic forecasts of earnings. We show that a large part (61.6%) of the overall optimistic bias in management earnings forecasts in Japan can be explained by loss forecast avoiding behavior of a small fraction (5.25%) of firms. Such behavior is caused in part by the view of the main bank and power group that the management forecast of earnings is the manager's earnings target. Our findings suggest that the Japanese stock market recognizes such loss forecast avoidance and accordingly discounts new information in management forecasts.

Original languageEnglish
Pages (from-to)79-101
Number of pages23
JournalInternational Journal of Accounting
Volume46
Issue number1
DOIs
Publication statusPublished - 2011 Mar

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Keywords

  • Forecast optimism
  • Japanese corporate culture
  • Loss forecast avoidance
  • Management forecasts

ASJC Scopus subject areas

  • Accounting
  • Finance

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