1 See, for example, King, Pownall, and Waymire (1990) and Hirst, Koonce, and Venkataraman (2008) for a review of the literature on management forecasts.
2 One exception is Lee, Matsunaga, and Park (2012), who use the absolute MFE as a proxy for the CEO's managerial ability and find that it is significantly positively related with the probability of CEO turnover. The relationship of this study to Lee, Matsunaga, and Park (2012) is discussed below.
14 Some studies examine the reasons for stopping quarterly forecasts (Houston, Lev, and Tucker 2010; Chen, Matsumoto, and Rajgopal 2011; Cai, Dhaliwal, Kim, and Pan 2014).
15 In particular, discretionary disclosure literature such as the studies by Verrecchia (1983) and Dye (1985), and the signaling model of Trueman (1986) are often cited as the basis of the hypotheses and interpretations (Pownall and Waymire 1989; Lev and Penman 1990; Karamanou and Vafeas 2005; Baik, Farber, and Lee 2011; Lee, Matsunaga, and Park 2012). In addition, the literature on the credibility of management forecasts such as Rogers and Stocken (2005) are based on the results of cheap talk models (Sansing 1992; Stocken 2000). All these models focus on capital market settings, although the results by Verrecchia (1983) are sometimes interpreted as proprietary costs in product markets cause partial disclosure equilibrium.
16 Earlier studies using management forecasts in Japan include those of Darrough and Harris (1991), Conroy, Harris, and Park (1998), and Conroy, Eades, and Harris (2000). Darrough and Harris (1991) use data from 1978 to 1987, but report that most of the observations are from 1985 to 1987 since consolidated data in Japan increases from 1985.
17 Agency models with management forecasts typically rely on the famous result called revelation principle (Dye 1983; Gigler and Hemmer 2001; Dutta and Gigler 2002; Sabac and Tian forthcoming). This principle states that under certain conditions, any equilibrium outcome of any mechanism can be replicated by a truth-telling equilibrium outcome under which agents directly and truthfully report their private information to the principal. However, this principle allows the existence of another more complex mechanism in the real world, which attains the same efficiency even when the assumptions of the revelation principle are not violated. In addition, some assumptions may be invalidated in reality (Arya, Glover, and Sunder 1998).
18 The analysis in the study by Suda and Hanaeda (2008) is based on 619 responses, comparable to 312 responses in the study by Graham, Harvey, and Rajgopal (2005). In the Suda and Hanaeda (2008) survey, respondents were asked to use a five-point scale, from −2 (“strongly disagree”) to +2 (“strongly agree”), which is what Graham, Harvey, and Rajgopal (2005) used. Note that as management forecasts in Japan are published on a quarterly basis after the fiscal year since April 2008, Suda and Hanaeda (2008) do not confine themselves to quarterly earnings when asking about earnings benchmarks, which slightly differs from Graham, Harvey, and Rajgopal (2005)'s survey