The effect of multinationality on management earnings forecasts

This study examines the relationship between a firm??s degree of multinationalityand its managers?? earnings forecasts. Firms with a high degree of multinationality aresubject to greater uncertainty regarding earnings forecasts due to the additional riskresulting from the more complex multinational environment. Prior research demonstratesthat firms that fail to meet or beat market expectations experience disproportionatemarket losses at earnings announcement dates. The complexities and greater uncertaintyresulting from higher levels of multinationality are expected to be negatively associatedwith management earnings forecast precision, accuracy, and bias (downward versusupward).Results of the study are mixed. Regarding forecast precision, two measures ofmultinationality (foreign sales / total sales and the number of geographic segments) aresignificantly negatively related to management earnings forecast precision. This was theexpected relationship. Regarding forecast accuracy, contrary to expectations, forecastaccuracy is positively related to multinationality, with regard to the number ofgeographic segments a firm discloses. Regarding forecast bias, unexpectedly, twomeasures of multinationality (foreign sales / total sales and number of countries withforeign subsidiaries) are significantly positively related to more optimistic managementearnings forecasts.