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Expectation Management Through Management Forecast - a Life of Tail Asymmetry Under Consecutive Adjustment

This paper examines whether firm managers engage in the expectation management of their current performances through their own forecasts and consecutive adjustments. Expectation management in order to achieve positive surprises by lowering analyst forecast levels has been documented (Bernhardt and Campello 2002, for example). However, those studies are based on an implicit assumption that managers effectively communicate with analysts to induce analysts' revisions, which is plausible but difficult to directly observe by researchers. We construct a study on the management own forecasts which the Japanese Stock Exchanges ask for the listed companies; thus, we base our results on explicit and quantitative data. Our major findings are followings: (1) at the onset of fiscal year, the distribution of changes in expected earnings from prior years is skewed positively (better prospects, positive tail asymmetry). (2) But these optimistic forecasts are not necessarily materialized; surprise of earnings (earnings realization minus initial forecasts) is reversely skewed (negative tail asymmetry). (3) This phenomenon is more remarkable among firms with initial forecasts of the highest earnings changes. (4) Further, a closer examination shows that, through interim revisions, the distribution of surprises in earnings from latest forecasts prior to earnings announcement date has a little positive tail asymmetry, regardless of consecutive adjustment made until then. This cycle (optimistic forecasts - negative revisions - positive surprises) suggests the discretionary management of earnings forecasts by managers. Consistent with prior research, we also find that tendency to avoid decreases in earnings from prior year level is pervasive.