The role of credibility in the relation between management forecasts and analyst forecasts in Japan

• Published in: Pacific-Basin finance journal 2019-06, Vol.55, p.29-45
• Main Authors: Aman, Hiroyuki, Beekes, Wendy, Chang, Millicent, Wee, Marvin
• Format: Article
• Language: English
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2019.03.002

This study examines the relation between management forecasts and analysts' forecasts to determine whether a moderating role exists for credibility. Management credibility is evaluated by management's prior forecasting ability and the firm's underlying corporate governance structure. Analyst credibility on the other hand is assessed using their prior forecasting ability only. Using Structural Equation Modelling, we find management credibility affects how much reliance analysts place upon information contained in management initial earnings forecasts when making their own forecasts. We also show a moderating role for analyst credibility in the relation between analysts' consensus initial forecasts and management forecast revisions. Our findings highlight the importance of reputation in the dissemination of earnings information. •Management credibility affects how much analysts rely on management forecasts in making their own forecasts.•Analyst credibility also impacts management reliance on their forecasts•SEM provides new insights into the management/analyst forecast relationship.•Reputation is important in the dissemination of earnings information.