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Xerox University Microfilms 300 North Zeeb Road Ann Arbor, Michigan 48106 75-11,340 FERRIS, Kenneth Robert, 1948- FORECAST DISCLOSURE OF EARNINGS: AN EMPIRICAL STUDY OF THE EFFECTS ON MANAGERIAL BEHAVIOR. The Ohio S tate U n iv e rs ity , P h.D ., 1974 Accounting Xerox University Microfilms,Ann Arbor, Michigan 48106 © 1975 KENNETH ROBERT FERRIS ALL RIGHTS RESERVED THIS DISSERTATION HAS BEEN MICROFILMED EXACTLY AS RECEIVED. FORECAST DISCLOSURE OF EARNINGS: AN EMPIRICAL STUDY OF THE EFFECTS ON MANAGERIAL BEHAVIOR DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Kenneth Robert Ferris, B.B.A., M.B.A., M.A. ***** The Ohio State University 1974 Reading Committee: Approved by Professor Thomas J. Burns Professor Paul E. Fertig Professor Ralph M. Stogdill TKw * * Associate Professor James P. McNaul A dviser Assistant Professor Douglas A. Wolfe Department of Accounting ACKNOWLEDG EMENTS I wish to express my appreciation for the support and assistance of my chairman and adviser, Thomas J. Burns. His concern for the success and well-being of his students has been unfailing, and for that, I especially thank him. My thanks are also extended to the other members of my d is s e rta tio n committee: Paul E. F e rtig , James P. McNaul, Ralph M. S to g d ill, and Douglas A. Wolfe. This research effort is dedicated to a grand and exceptional human being, Marilyn. I am also obliged to mention the long-standing friend­ ship of "sorry dogs" and "foreign trash." This research was supported in part by an Ernst and Ernst Disserta­ tion Grant. I hope that I am able to look back on this work and not desire to alter it too substantially. VITA July 8, 1948 ................................................... Born - Baltimore, Maryland 1969 ................................................................... B.B.A., The George Washington University, Washington, D. C. 1970 ................................................................... M.B.A., The George Washington University, Washington, D. C. 1973 ................................................................... M.A., The Ohio State University, Columbus, Ohio 1970-1974 ....................................................... Teaching Associate, Department of Accounting, The Ohio S tate Univers Columbus, Ohio 1974 .................................................................. Ernst & Ernst Dissertation Fellow FIELDS OF STUDY Major Field: Accounting Minor Fields: Economic Theory and Organizational Behavior TABLE OF CONTENTS Page ACKNOWLEDGEMENTS............................................. i i VITA ................................................................................................................................ i i i LIST OF FIGURES.................................................................................................... v ii LIST OF TABLES...................................................................................................... v i i i Chapter I.INTRODUCTION ............................................................................................... 1 The Problem to be Investigated The Scope of the Study The Need for the Research A Model of A nticipated Behavioral Responses Managerial Forecast Behavior Managerial Behavior Subsequent to Forecast D isclosure I I . RESEARCH METHODOLOGY.................................................................... 17 Description of the Basic Data Unit Description of the Data Source Description of the Study Period Study Limitations An Analysis of Managerial Forecast Behavior Relative Forecast Error Statistical Analysis and Hypotheses Limitations of Analysis An Analysis of Managerial Behavior Subsequent to the Forecast: The Annual Statement of Accounts A Theory of Forecast-Deviation Minimization A Note Concerning the Prospectus Situation An Analysis of Managerial Behavior Subsequent to the Forecast: A Questionnaire Survey iv C hapter Page Construction of the Questionnaire Construction of the Forecast-Induced Pressure Questionnaire Scoring the Questionnaire Validity of the Questionnaire Reliability of the Questionnaire III. ANALYSIS OF THE DATA ..................................................................... 52 Data Description Results D escription of Sample Description of Forecast Type Description of Forecast Period Data Analysis of Managerial Forecast Behavior Analysis of Overestimated and Underestimated Forecasts Analysis of the C o efficien t of Skewness Analysis of the Relative Forecast Error Distributed by Industry Classification Analysis of the Relative Forecast Error Distributed by Size Classification Data Analysis of Managerial Behavior Subsequent to the Forecast: The Annual Statement of Accounts Data Analysis of Managerial Behavior Subsequent to the Forecast: The Questionnaire Survey D escription of Questionnaire Sample A Comment on Response Bias Reliability of the Questionnaire Results Analysis of Some Consequences of Forecast Disclosure Analysis of the Overestimation and Underestimation of Forecasts Analysis of the Use of Accounting Adjustments to Minimize Forecast Deviations Analysis of the Use of Discretionary Actions to Minimize Forecast Deviations Analysis of the Forecast-Induced Pressure Questionnaire A Final Comment on Questionnaire Result V alid ity IV. SUMMARY, CONCLUSIONS, AND RESEARCH RECOMMENDATIONS . 133 Summary of R esults v Chapter Page Conclusions A Revised Theory of Managerial Behavior in the Prospectus Forecast Disclosure Situation Concluding Remarks and Research Recommendations APPENDIX A. SAMPLE PROSPECTUS FORECAST .................................................................. 146 B. FORM LETTER REQUESTING ANNUAL STATEMENT OF ACCOUNTS . 150 C. LISTING OF SAMPLE FIRMS BY YEAR......................................................... 152 D. FORM LETTERS FOR QUESTIONNAIRE SURVEY ........................................... 160 E. QUESTIONNAIRE.................................................................................................. 165 F. ANALYSIS OF ACCOUNTING CHANGES ......................................................... 182 G. ANALYSIS OF PART ONE OF QUESTIONNAIRE........................................... 184 SELECTED BIBLIOGRAPHY ....................................................................................... 187 v i LIST OF FIGURES Figure Page 1. A Model of Anticipated Behavioral Responses to the Forecast Disclosure Situation .................................................. 7 2. Zone of A c ce p ta n ce ............................................................................... 36 3. Histogram of the Relative Forecast Error: 1970 . 74 4. Histogram of the Relative Forecast Error: 1971 . 75 5. Histogram of the Relative Forecast Error: 1972 . 76 6. Histogram of the Relative Forecast Error: 1973 . 77 7. Histogram of the Relative Forecast Error: 1970-1973 . 78 8. Graphs of the Mean of the Relative Forecast Error Distributed by Firm Size: 1970, 1971, 1972, 1973 . 85 9. Histogram of the Forecast-Induced Pressure Index Scores . ........................... 129 v i i LIST OF TABLES Table Page 1. Response Rates for Annual Statement of Accounts and Report of D irectors ........................ ............................................. 53 2. Types of Share Issues ...................................................................... 54 3. Industrial Classification ............................................................. 55 4. Size Classification .......................................................................... 56 5. Forecast T y p e .......................................................................................

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