RIEB Discussion Paper Series No.2013-31


Managerial Discretion over Their Initial Earnings Forecasts


We examine the existence and incentive of managerial discretion in Japanese firms when their initial management earnings forecasts are issued simultaneously with their earnings announcements. While most prior studies have examined the discretionary behaviors used to meet earnings forecasts at the end of the fiscal year, our study focuses on the forecast innovations that are considered important forecasts-based earnings benchmark at the earnings announcement. First, we find that managers engage in forecasts management to avoid reporting negative forecast innovations. Second, we find that firms in higher product market competition are more likely to conduct forecasts management. Finally, our additional analyses indicate that, on average, forecast innovations are informative for stock investors, but investors can discount forecasts with higher forecasts management. Further analysis shows that managers conducting forecasts management for their initial earnings forecasts are more likely to revise their forecasts downward during the fiscal year to meet their earnings forecasts, but will not use discretionary accruals for this purpose.


Management forecasts, Forecasts management, Forecast innovations, Product market competition, Japan

JEL Classification



Faculty of Commerce, Kansai University, Japan

Graduate School of Business Administration, Kobe University, Japan

Akinobu SHUTO
School of Management, Yale University, USA
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059