The Effect of Manager Forecast of Future Sales on Company Risk during Sales Decline Using the Fama-French Five-Factor Model

Abstract

A sales decline period disrupts the time series of earnings and, consequently, reduces their predictability. Such a situation can lead to inappropriate decisions by investors. Therefore, managers need to respond appropriately to negative news resulting from sales decline. Manager response is related to forecasting future sales situations, which could affect risk to the firm. In this study, the ratio of the operating profit margin was used to compare companies with optimistic and pessimistic managers. To investigate the research hypotheses, the Fama-French five-factor model has been used depicting a period of 11 years, from 2007 to 2017, for the companies that are accepted in the Tehran Stock Exchange. It should be noted that market beta of the Fama-French five-factor model is distinguished by upside potential and downside risk factors making it possible to study them individually. The findings imply that in companies with optimistic managers, the upside potential is more than the downside risk, but in companies with pessimistic managers, there is no significant difference between the two. In companies with optimistic managers, upside potential changes are incremental in the period after the decline in sales compared to the period before sales decline.