Mandatory Management Forecasts, Forecast Revisions, and Abnormal Accruals

Purpose: Current systems of regulation in Japan require that listed firms disclose earnings forecasts for the coming fiscal year. The Japanese Business Federation is contesting this requirement, requesting that mandatory forecast disclosures be abolished. The purpose of this study is to investigate the relationships (1) between accruals and initial management earnings forecast errors, and (2) between accruals and forecast revisions. Further, the study offers a preliminary discussion of the economic costs of mandatory earnings forecasting, with a specific focus on firms operating under conditions of uncertainty or facing difficulty in analyzing economic information.Design/Methodology/Approach: To investigate the relationship between accruals and management forecast errors (revisions), multiple regression models were designed using data covering the period between 2003 and 2013, pertaining to listed Japanese firms. A model developed by Dechow and Dichev (2002) was applied to estimate normal and abnormal accruals. Findings: I found a positive relationship between accruals and initial management earnings forecast errors, and a negative relationship between accruals and forecast revisions. Further, the relationship between accruals and management forecast errors (revisions) is more pronounced among firms operating in uncertain business environments or facing difficulty in analyzing economic information.Originality/Value: The study provides an important analysis of abnormal working capital accruals in relation to both initial management earnings forecast errors and forecast revisions. While total accruals or working capital accruals have been documented in prior studies in this regard, abnormal accruals have not. Furthermore, this study offers a preliminary discussion of the economic costs associated with earnings forecasting under conditions of mandatory disclosure. The economic impact of forecasting has not previously been addressed under either mandatory or voluntary conditions