Are More Able Managers Good Future Tellers? Learning from Japan
We investigate managers’ forecasting ability by examining the impact of managerial ability on the accuracy of management forecasts. Focusing on Japan, where almost all managers issue annual earnings forecasts at the beginning of the year, we extend the literature by exploring (1) whether high-ability managers are truly good at predicting future performance and (2) how high-ability managers increase their forecast accuracy. We find that managerial ability is negatively associated with forecast errors based on initial forecasts, suggesting that high-ability managers are more likely to issue accurate forecasts at the fiscal year beginning. We then provide evidence that high-ability managers are less likely to revise their initial earnings forecasts. Finally, we show that high-ability managers are less likely to conduct earnings management to improve their accuracy in management earnings forecasts. Evidence shows that while high-ability managers are more likely to issue accurate initial management forecasts, low-ability managers are more likely to adopt revisions and earnings management to reduce their forecast errors.