We are grateful to the editor and an anonymous referee for their helpful comments and suggestions. We thank workshop participants at Boston College, Columbia University, Harvard University, University of Michigan, University of Miami, and Nanyang Technological University for useful comments and suggestions.
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Do Managers Always Know Better? The Relative Accuracy of Management and Analyst Forecasts
Article first published online: 6 JUN 2012
DOI: 10.1111/j.1475-679X.2012.00461.x
Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2012
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How to Cite
HUTTON, A. P., LEE, L. F. and SHU, S. Z. (2012), Do Managers Always Know Better? The Relative Accuracy of Management and Analyst Forecasts. Journal of Accounting Research, 50: 1217–1244. doi: 10.1111/j.1475-679X.2012.00461.x
Publication History
- Issue published online: 23 OCT 2012
- Article first published online: 6 JUN 2012
- Accepted manuscript online: 10 MAY 2012 03:34AM EST
- Received 4 January 2011; accepted 24 April 2012
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ABSTRACT
We examine the relative accuracy of management and analyst forecasts of annual EPS. We predict and find that analysts’ information advantage resides at the macroeconomic level. They provide more accurate earnings forecasts than management when a firm's fortunes move in concert with macroeconomic factors such as Gross Domestic Product and energy costs. In contrast, we predict and find that management's information advantage resides at the firm level. Their forecasts are more accurate than analysts’ when management's actions, which affect reported earnings, are difficult to anticipate by outsiders, such as when the firm's inventories are abnormally high or the firm has excess capacity or is experiencing a loss. Although analysts are commonly viewed as industry specialists, we fail to find evidence that analysts have an information advantage over managers at the industry level. The two have comparable abilities to forecast earnings for firms with revenues or earnings that are more synchronous with their industries.