Do Managers Bias Earnings Forecasts in Response to Current Earnings Surprises?

Each quarter, managers provide a summary of their firm’s accounting performance – a disclosure known as a quarterly earnings announcement. Earnings announcements attract significant attention from investors and media outlets because, if earnings are different than market expectations, stock price will change and financial analysts will revise their forecasts of future earnings. These effects are magnified if investors and analysts view the current earnings as persistent.  Managers are therefore justifiably concerned with the extent to which current earnings fall in line with market expectations, and the extent to which investors and analysts view any differences as being persistent.

To assist the assessment of whether current earnings will persist into the future, managers often issue their own forecast of future earnings in the press release or during the conference call that occurs shortly after the current earnings release. Our research study (Baginski, Campbell, Ryu, and Warren 2019) examines if managers use these forecasts of future earnings strategically to influence investors’ interpretation of the current earnings news. We offer three main findings. First, managers tend to release forecasts with their firm’s earnings announcement that turn out to be optimistically biased (i.e., the forecast is higher than what actual future earnings turns out to be) to offset bad current earnings announcement news. Second, managers tend to release forecasts that are pessimistically biased to offset simultaneously released large good current earnings news. We also find that managers engage in more of this behavior when they (1) have more flexibility to insert bias into their forecasts without being detected and (2) have greater career concerns. Finally, we find that, initially, market participants are unable to fully identify the bias that managers insert into their forecasts, but that investors eventually figure it out as news about future performance begins to arrive.

It is intuitive why managers would not want to release bad current earnings announcement news. Specifically, bad earnings news is associated with negative stock price responses and increased likelihood of termination. Thus, if earnings are below expectations, managers have an incentive to soften the blow of the bad news by altering investor assessments of the persistence of the bad news. We find that managers strategically soften the blow by providing an optimistically biased forecast with the bad current earnings news. However, what may be less intuitive is why managers wish to offset large good current earnings news. Notably, exceeding expectations by a large amount can be problematic for two reasons. First, investors perceive managers to be higher quality when they oversee a smooth and persistence earnings trend (Beyer, Cohen, Lys, and Walther 2010), and abnormally large unexpected earnings decrease the smoothness of earnings. Second, managers face pressure to meet or beat market expectations in each period (Brown and Caylor 2005; Bartov, Givoly, and Hayn 2002; Graham, Harvey, and Rajgopal 2005), and abnormally high earnings in the current period are more likely to elevate expectations of next period’s earnings to a level that is not beatable. Consistent with these incentives, we find that managers also strategically offset large good current earnings news by providing pessimistically biased forecasts along with the good news.

Prior academic research suggests that when managers must disclose bad news, they tend to selectively disclose other good news to offset it. However, two things have been left unaddressed. First, prior work does not speak to whether the good news used to offset the bad news is real (i.e., consistent with economic reality), or rather inserted with optimistic bias. Our study suggests that managers strategically bias these good news disclosures to offset the simultaneously released bad earnings announcements. Second, prior research does not examine whether managers also attempt to offset good news disclosures. Our study suggests that managers also strategically insert pessimistic bias to offset abnormally good earnings announcements.  

Overall, our study provides evidence that the simultaneous release of multiple earnings signals can affect the extent to which the disclosure is forthcoming. In recent years, almost 90 percent of management forecasts are disclosed with the earnings announcement (Gong, Li, and Xie 2009; Billings, Jennings, and Lev 2015). By documenting that current earnings news can prompt managers to bias their forecasts, we provide evidence of an alternative to managing earnings directly to avoid bad earnings news in mandatory earnings reports (e.g., Burgstahler and Dichev 1997; Degeorge, Patel, and Zeckhauser 1999; Roychowdhury 2006) or biasing pro forma earnings to influence investor perceptions (Black, Christensen, Joo, and Schmardebeck 2017).


Baginski, Steve, John Campbell, Patrick Ryu, and James Warren. 2019. “Do Managers Bias their Forecasts of Future Earnings in Response to their Firm’s Current Earnings Announcement Surprises?” Working paper, University of Georgia.

Bartov, Eli, Dan Givoly, and Carla Hayn. 2002. “The Rewards to Meeting or Beating Earnings

Expectations.” Journal of Accounting & Economics 33 (2): 173–204.

Beyer, Anne, Daniel A. Cohen, Thomas Z. Lys, and Beverly R. Walther. 2010. “The Financial Reporting Environment: Review of the Recent Literature.” Journal of Accounting & Economics 50 (2/3): 296–343.

Billings, Mary, Robert Jennings, and Baruch Lev. 2015. “On Guidance and Volatility.” Journal of Accounting & Economics 60 (2/3): 161–80.

Black, Ervin L., Theodore E. Christensen, T. Taylor Joo, and Roy Schmardebeck. 2017. “The Relation Between Earnings Management and Non- GAAP Reporting.” Contemporary Accounting Research 34 (2): 750–82.

Brown, Lawrence D., and Marcus L. Caylor. 2005. “A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences.” Accounting Review 80 (2): 423–40.

Burgstahler, David, and Ilia Dichev. 1997. “Earnings Management to Avoid Earnings Decreases and Losses.” Journal of Accounting & Economics 24 (1): 99.

Degeorge, François, Jayendu Patel, and Richard Zeckhauser. 1999. “Earnings Management to Exceed Thresholds.” The Journal of Business 72 (1): 1–33.

Graham, John R., Campbell R. Harvey, and Shiva Rajgopal. 2005. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting & Economics 40 (1–3): 3–73.

Gong, Guojin, Laura Yue Li, and Hong Xie. 2009. “The Association between Management Earnings Forecast Errors and Accruals.” Accounting Review 84 (2): 497–530.

Roychowdhury, Sugata. 2006. “Earnings Management through Real Activities Manipulation.” Journal of Accounting & Economics 42 (3): 335–70.

This post comes to us from professors Stephen P. Baginski and John L. Campbell at the University of Georgia, and from Patrick Ryu and James Warren, who are PhD candidates at the University of Georgia. It is based on their recent paper, “Do Managers Bias their Forecasts of Future Earnings in Response to their Firm’s Current Earnings Announcement Surprises?” available here.