Management Forecasts Essay

1011 Words Jun 15th, 2011 5 Pages
Article Summary
“Management Earnings Forecasts: A Review and Framework” by D. E. Hirst, L. Koonce and S. Venkataraman explained the antecedents, characteristics and consequences interlinked with earnings forecasts. Antecedents are characteristics that are prevalent prior to the consequence such as the existing environment/firm specific characteristics; and consequence is the outcome from antecedents and characteristics. Characteristics are the choices the management has deciding on how the report will be issued. The article guides the reader giving explanations of why management decides to release earnings forecasts, interactions of the three variables and its findings and how these findings may impact one period to another. Studies
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Although managers may want to convince the investors their company’s value by providing pro forma reports that is plausible, they may want to consider the fact that this is only short term credibility because according to Hirst et al. (1999) only when the prior forecast is accurate do they consider future forecasts. The choices aren’t clear-cut on why the management continues to release misleading pro forma reports, the incentives behind them may be bonuses tied to stock prices or on the other hand management may want to release pro forma reports that is symmetrical to financial statements to reduce the asymmetry of information between managers, analysts and shareholders (Ajinkya and Gift 1984; Verrecchia 2001). It would be best for management to issue accurate pro forma reports to maintain creditability with the shareholders and the analysts because in the long-run the investors will depend on the entity’s reports for accuracy thus creating creditability which is the fundamental foundation of any business.

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