TY - JOUR
T1 - The effects of forecast type and performance-based incentives on the quality of management forecasts
AU - Chen, Clara Xiaoling
AU - Rennekamp, Kristina M.
AU - Zhou, Flora H.
N1 - We thank the Editor (Lisa Koonce), the Discussant (Jeffrey Hales), and an anonymous reviewer for helpful guidance and suggestions. We also thank Nathalie Beckers, Chris Chapman, Kristina Demek, Bart Dierynck, Brooke Elliott, Cassandra Estep, Christoph Feichter, Brent Garza, Steph Grant, Lan Guo, Kevin Jackson, Qiwei Li, Bob Libby, Joan Luft, Mark Peecher, Steve Salterio, Karl Schuhmacher, Timothy Shields, Huaxiang Yin and workshop participants at Maastricht University, Nanyang Technological University, Tilburg University, Wilfrid Laurier University, the Accounting, Organizations and Society Conference on Accounting Estimates, the American Accounting Association Annual Meeting, and the American Accounting Association Management Accounting Section Midyear Meeting for their helpful comments. We gratefully acknowledge financial support from Deloitte & Touche LLP and the National Natural Science Foundation of China Funds (No. 71402086 ).
PY - 2015/10/1
Y1 - 2015/10/1
N2 - Understanding forecasts is important because of their pervasiveness in business decisions such as budgeting, production, and financial reporting. In this study we use an abstract experiment to examine how the preparation of disaggregated forecasts interacts with performance-based incentives to influence the accuracy and optimism of forecasts. We manipulate two factors between subjects at two levels each: forecast type (disaggregated or aggregated) and performance-based incentives (present or absent). Consistent with our predictions, we find that (1) preparing disaggregated forecasts leads to greater improvements in forecast accuracy (compared to preparing aggregated forecasts) in the absence of performance-based incentives than in the presence of performance-based incentives, and (2) preparing disaggregated forecasts leads to greater increases in forecast optimism (compared to preparing aggregated forecasts) in the presence of performance-based incentives than in the absence of performance-based incentives. Our study contributes to our understanding of unintentional biases in the forecasting process. Our results have important practical implications for designers of management control systems who elicit internal forecasts from managers. Finally, our results also have important practical implications for those who either prepare or use external management forecasts.
AB - Understanding forecasts is important because of their pervasiveness in business decisions such as budgeting, production, and financial reporting. In this study we use an abstract experiment to examine how the preparation of disaggregated forecasts interacts with performance-based incentives to influence the accuracy and optimism of forecasts. We manipulate two factors between subjects at two levels each: forecast type (disaggregated or aggregated) and performance-based incentives (present or absent). Consistent with our predictions, we find that (1) preparing disaggregated forecasts leads to greater improvements in forecast accuracy (compared to preparing aggregated forecasts) in the absence of performance-based incentives than in the presence of performance-based incentives, and (2) preparing disaggregated forecasts leads to greater increases in forecast optimism (compared to preparing aggregated forecasts) in the presence of performance-based incentives than in the absence of performance-based incentives. Our study contributes to our understanding of unintentional biases in the forecasting process. Our results have important practical implications for designers of management control systems who elicit internal forecasts from managers. Finally, our results also have important practical implications for those who either prepare or use external management forecasts.
KW - Disaggregated forecasts
KW - Forecast type
KW - Management estimates
KW - Management forecasts
KW - Performance-based incentives
KW - Unintentional optimism
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U2 - 10.1016/j.aos.2015.03.002
DO - 10.1016/j.aos.2015.03.002
M3 - Article
AN - SCOPUS:84959249037
SN - 0361-3682
VL - 46
SP - 8
EP - 18
JO - Accounting, Organizations and Society
JF - Accounting, Organizations and Society
ER -