The effect of CEO adverse professional experience on management forecast pessimism

Abstract

We examine how CEOs' past experiences of corporate distress affect their subsequent forecast behaviour. We find that CEOs who experienced distress in a non‐CEO position at another firm issue more pessimistic management earnings forecasts after becoming CEO at their current firm. The effect of such experiences on CEOs' forecasting behaviour is more pronounced when these have occurred more frequently or recently. The effect of distress experiences is mitigated for overconfident and experienced CEOs, but amplified in firms with poor performance and high uncertainty. Our findings suggest that CEOs who experienced corporate distress could be overly cautious when forecasting future earnings.