This paper studies the properties and determinants of managers’ multi-year financial forecasts. Using one- to five-year-ahead forecasts reported by private venture-backed firms, we ask whether, by how much, and why biases in managers’ forecasts of revenues, expenses and profits depend on the forecasting horizon and the verifiability of assets. We find that profitability forecasts contain a strategic component, in that  one-year-ahead revenue (expense) forecasts are slightly and asymmetrically pessimistic (optimistic), while five-year-ahead forecasts are hugely and asymmetrically optimistic (pessimistic); and  biases in revenue and expense forecasts are larger, the harder to verify or more intangible-intensive are firms’ assets.
Review of Accounting Studies – Springer Journals
Published: Mar 28, 2007
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