The joint effects of management incentives and perceived locus of causality on management earnings forecast disclosures

Abstract

This study investigates the effect of management incentives (directive and transparency) and locus of causality (internal and external) on the willingness of managers to disclose management earnings forecast reports and the accuracy of management’s earnings forecast information. The experimental findings show that managers with directive incentives are less likely to disclose the earnings forecast and provide less accurate information to market participants than managers with transparency incentives, for both point and range forecast forms. In addition, locus of causality contributes to the accuracy of management earnings forecast information when the forecasts suggest underperformance, but the findings reveal no significant differences in the willingness of management to issue earnings forecasts. Managers tend to provide more accurate earnings forecasts in the range form when the poor performance is internal rather than external. There are fewer clear causal effects on the accuracy of point earnings forecasts. When focusing on the joint effects of management incentives and locus of causality, these factors influence the willingness of management to issue earnings forecast and to provide accurate earnings forecast. The willingness of directive managers to issue earnings forecasts is impacted more by internal and external factors than it is for transparency managers. The results show that when performance is affected by external business factors, directive managers’ point earnings forecasts are less accurate. However, there is no joint effect of management incentives and locus of causality on the accuracy of earnings forecasts in range form. The implications of these findings are for regulators related to the voluntary disclosure of management’s earnings forecasts. Particularly, the consideration of an earnings forecast’s form enhances the accuracy of the forecast.