The Value Relevance of Management Forecasts and Their Impact on Analysts' Forecasts: Empirical Evidence from Japan

A major financial disclosure feature in Japan is that stock exchanges require firms to provide next year's earnings forecasts. This study investigates the value relevance of Japanese management earnings forecasts and their impact on analysts' earnings forecasts. First, the value relevance of management forecasts is investigated using a valuation framework provided by Ohlson (2001), in which firm value is expressed as a function of book value, current earnings and next year's expected earnings. The analysis yields that of the three accounting variables examined, management forecasts have the highest correlation and incremental explanatory power with stock price. Next, the impact of management forecasts on analysts' forecasts is examined. The results show that more than 90% of changes in analysts' forecasts are explained by management forecasts alone. Further analysis reveals that the heavy dependence of financial analysts on management forecasts in formulating their own forecasts may partially be attributed to the relatively high accuracy of management forecasts. At the same time, financial analysts also somewhat modify management forecasts when certain financial factors indicate that the credibility of management forecasts is in doubt. Overall, this study presents empirical evidence that Japanese management forecasts provide useful information for the market and have a significant influence on analysts' forecasts.