Forecast Errors in Undisclosed Management Sales Forecasts: The Disappearance of the Overoptimism Bias

Previous empirical evidence which evaluated the accuracy of management earnings or sales forecasts consistently revealed these forecasts to be on average significantly overoptimistic. However, all studies analyzed forecasts from public disclosures, which are an important signal to investors and analysts and thus likely biased by strategic considerations. To disentagle, whether and to which extent strategic deception or cognitive biases are resposible for this overoptimism, the present study analyzes the accuracy of 6,276 undisclosed, company-internal sales forecasts, which German firms provided anonymously to the IAB Establishment Panel. Quite surprisingly, the study reveals the average forecast to be significantly overpessimistic. I propose that the non-existence of a general bias towards overoptimism is due to the lack of incentives to consciously overgloss future prospects in undisclosed forecasts and that overpessimism may be a consequence of loss aversion.

[1]  Tobias Wenzel,et al.  Deregulation of Shopping Hours: The Impact on Independent Retailers and Chain Stores , 2011 .

[2]  Alexandra Schmucker,et al.  European Data Watch: The IAB Establishment Panel - Things Users Should Know , 2009 .

[3]  Brad M. Barber,et al.  Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment , 1998 .

[4]  Justus Haucap,et al.  Consumer Behavior towards On-net/Off-net Price Differentiation , 2011 .

[5]  Jean-Philippe Nicolaï,et al.  The Role of Abatement Technologies for Allocating Free Allowances , 2011 .

[6]  Ralf Dewenter,et al.  Calling Party Pays or Receiving Party Pays? The Diffusion of Mobile Telephony with Endogenous Regulation , 2005, Inf. Econ. Policy.

[7]  Dan Lovallo,et al.  Delusions of Success , 2003 .

[8]  Justus Haucap,et al.  On File Sharing With Indirect Network Effects Between Concert Ticket Sales and Music Recordings , 2012 .

[9]  Joseph A. Clougherty,et al.  Using rival effects to identify synergies and improve merger typologies , 2010 .

[10]  Mehmet Karaçuka,et al.  Competition in Turkish mobile telecommunications markets: Price elasticities and network substitution , 2011 .

[11]  Tobias Wenzel,et al.  Transparency, entry, and productivity , 2012 .

[12]  Douglas J. Skinner,et al.  Management Forecasts in Japan: An Empirical Study of Forecasts that are Effectively Mandated , 2009 .

[13]  Justus Haucap,et al.  Legal and illegal cartels in Germany between 1958 and 2004 , 2010 .

[14]  Jonathan L. Rogers,et al.  Credibility of Management Forecasts , 2003 .

[15]  Mehmet Karacuka,et al.  A Spatial Approach To Measure Productivity Spillovers Of Foreign Affiliated Firms In Turkish Manufacturing Industries , 2012 .

[16]  Annika Herr,et al.  Quality and Welfare in a Mixed Duopoly with Regulated Prices: The Case of a Public and a Private Hospital , 2011 .

[17]  Klaus Gugler,et al.  How Effective is European Merger Control , 2011 .

[18]  A. Barth,et al.  Irrationality rings! - Experimental evidence on mobile tariff choices , 2011 .

[19]  Torben Stühmeier,et al.  Access regulation with asymmetric termination costs , 2013 .

[20]  Tobias Wenzel,et al.  Getting beer during commercials: Adverse effects of ad-avoidance , 2011, Inf. Econ. Policy.

[21]  Clémence Christin,et al.  Entry Deterrence Through Cooperative R&D Over-Investment , 2013 .

[22]  Christian Seiler,et al.  Der »Test des Tests« im Handel – eine Metaumfrage zum ifo Konjunkturtest , 2009 .

[23]  Christian Wey,et al.  On the role of consumer expectations in markets with network effects , 2012 .

[24]  Søren L. Buhl,et al.  Underestimating Costs in Public Works Projects: Error or Lie? , 2002, 1303.6604.

[25]  Hans-Theo Normann,et al.  Vertical Mergers, Foreclosure and Raising Rivals' Costs – Experimental Evidence , 2011 .

[26]  Dawn A. Matsumoto,et al.  Management's Incentives to Avoid Negative Earnings Surprises , 2002 .

[27]  B. Balsmeier,et al.  Outside board memberships of CEOs: Expertise or entrenchment? , 2011 .

[28]  Mehmet Karaçuka,et al.  A comparative analysis of alternative univariate time series models in forecasting Turkish inflation , 2012 .

[29]  Geza Sapi,et al.  Technology Licensing by Advertising Supported Media Platforms: An Application to Internet Search Engines , 2011 .

[30]  Thomas D. Jeitschko,et al.  Signaling in deterministic and stochastic settings , 2012 .

[31]  Claudia Keser,et al.  Technology adoption in markets with network effects: Theory and experimental evidence , 2012, Inf. Econ. Policy.

[32]  Mehmet Karaçuka,et al.  The bank lending channel in Turkey: has it changed after the low-inflation regime? , 2012 .

[33]  Tobias Wenzel,et al.  Transparency, price-dependent demand and product variety , 2011 .

[34]  Brian Wallace,et al.  The impact of the termination rule on cooperation in a prisoner’s dilemma experiment , 2012, Int. J. Game Theory.

[35]  Ron Kasznik.  On the Association between Voluntary Disclosure and Earnings Management , 1996 .

[36]  K. Ota.  The Value Relevance of Management Forecasts and Their Impact on Analysts' Forecasts: Empirical Evidence from Japan , 2010 .

[37]  Ralf Dewenter,et al.  Semi-collusion in media markets , 2011 .

[38]  Stefan Haigner,et al.  The first shall be last: serial position effects in the case contestants evaluate each other , 2010 .

[39]  Achim Hauck,et al.  The euro area interbank market and the liquidity management of the eurosystem in the financial crisis , 2010 .

[40]  P. Brown,et al.  The accuracy of management dividend forecasts in Australia , 2000 .

[41]  John Maloney,et al.  And a vision appeared unto them of a great profit: evidence of self-deception among the self-employed , 2000 .

[42]  Jörg Drechsler.  The IAB Establishment Panel , 2011 .

[43]  Bent Flyvbjerg,et al.  Delusions of Success , 2003 .

[44]  Oliver Kim,et al.  Optimistic bias in management forecasts by Japanese firms to avoid forecasting losses , 2011 .

[45]  Paolo Buccirossi,et al.  Competition Policy and Productivity Growth: An Empirical Assessment , 2009 .

[46]  Colin F. Camerer,et al.  Behavioral economics and its applications , 2011 .

[47]  Hans-Theo Normann,et al.  A Within-Subject Analysis of Other-Regarding Preferences , 2010, Games Econ. Behav..

[48]  Matthias Heinz,et al.  Do Women Behave More Reciprocally than Men? Gender Differences in Real Effort Dictator Games , 2012 .

[49]  Thomas Straub,et al.  Reasons for frequent failure in mergers and acquisitions : a comprehensive analysis , 2007 .

[50]  M. Firth,et al.  The Accuracy of Profits Forecasts in Initial Public Offering Prospectuses , 1992 .

[51]  Hussein A. Warsame,et al.  The accuracy of Canadian and New Zealand earnings forecasts: A comparison of voluntary versus compulsory disclosures , 1994 .

[52]  Roman Inderst,et al.  Countervailing power and dynamic efficiency , 2011 .

[53]  Colin Camerer,et al.  Behavioral Economics of Organizations , 2012 .

[54]  D. Kahneman,et al.  Delusions of success. How optimism undermines executives' decisions. , 2003, Harvard business review.

[55]  Colin Camerer,et al.  Overconfidence and Excess Entry: An Experimental Approach , 1999 .