Essays on forecasting

This thesis consists of two studies exploring the issues relating to financial forecasts made within an organization. The first study investigates the effects of the adoption of rolling forecasts on the quality of product line forecasts of sales and contribution margins. Using quarterly regional data from several product lines of a multinational biotechnology supplier, I find evidence of improved forecast accuracy and reduced budgetary slack after the adoption of rolling forecasts. However, no improvement in forecast accuracy is documented for product lines that operated in environments exhibiting higher demand uncertainty. Furthermore, the reduction in slack is evident even for projections that are tied explicitly to compensation, suggesting that the rolling forecast process in itself can deter manipulation of forecasts. However, forecasts made for quarters that are further out (1) tend to have as much slack as projections made prior to the adoption of rolling forecasts, and (2) appear to be gradually adjusted upward over time. Finally, results show that forecast revisions tend to be overly optimistic, reflecting a systematic overreaction to good news and underreaction to bad news. The second study, co-authored with Robert Stoumbos, investigates how internal organizational factors affect earnings forecast revision behavior and outcomes. An implicit assumption in the extant research on earnings guidance is that managers can easily obtain and incorporate news into their forecasts; managers can then decide, depending on their incentives, whether or not to disclose this information to the market and revise their forecasts. The results of this study suggest that geographical complexity and cost structure, which are organizational factors that may diminish a managers' ability to gather and process information to revise forecasts, affect the propensity of managers to revise earnings forecasts, even in the presence of incentives that would motivate increased discretionary disclosure. Furthermore, the magnitude of forecast errors that result after actual earnings are realized and reported is negatively associated with firm complexity. This study addresses the call for integration between financial and managerial accounting research by documenting the link between internal firm characteristics, particularly organizational complexity and cost structure, and managerial disclosure choices

Because of “Because”: Examining the Use of Causal Language in Relative Performance Feedback

ABSTRACT This study examines how the use of causal language in conveying relative performance feedback impacts subsequent task performance. Research in linguistics has shown that causal language, defined as language reflecting the search for reasons (commonly expressed through words such as “because” and “thus”), impacts how recipients process received information. We use a laboratory experiment to show that causal language has a differential effect when used in negative versus positive feedback. In the case where initial relative performance is low, the high use of causal language in the resulting negative performance feedback leads to a greater improvement in subsequent performance, compared to low use of causal language. Conversely, when initial relative performance is high, greater use of causal language in delivering positive feedback results in a smaller improvement in performance. Our results indicate that employees' cognitive processes and reactions to performance feedback are influenced by the language used in explanations.</jats:p

Conflict of interest and the intrusion of bias

This paper explores the psychology of conflict of interest by investigating how conflicting interests affect both public statements and private judgments. The results suggest that judgments are easily influenced by affiliation with interested partisans, and that this influence extends to judgments made with clear incentives for objectivity. The consistency we observe between public and private judgments indicates that participants believed their biased assessments. Our results suggest that the psychology of conflict of interest is at odds with the way economists and policy makers routinely think about the problem. We conclude by exploring implications of this finding for professional conduct and public policy