Conclusion
In this study, we use an abstract experiment to examine how forecast type interacts with performance-based incentives to influence both the accuracy and optimism of management forecasts. We find that: (1) preparing disaggregated forecasts leads to a greater improvement 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 a greater increase in forecast optimism (compared to preparing aggregated forecasts) in the presence of performancebased incentives than in the absence of performance-based incentives. Although our study focuses on the disaggregation of information in managers’ performance forecasts, our results have implications for a wide variety of disclosures prepared by managers. Both textual (e.g., MD&A) and verbal (e.g., conference call) disclosures can vary in the extent to which qualitative and quantitative information is disaggregated. Furthermore, the Financial Accounting Standards Board’s (FASB’s) emphasis on disaggregated financial reporting as part of their Financial Statement Presentation Project suggests that disaggregation may play an increasingly important role in mandatory disclosures, in addition to voluntary disclosures. Our study suggests that the quality of these disclosures may vary depending on the extent to which these disclosures are disaggregated and the forecasting approach managers use to arrive at these disclosures. We also expect that, to the extent that analysts work closely with the firms on which they provide forecasts and have incentives to provide optimistic forecasts (Koonce & Mercer, 2005; Libby, Hunton, Tan, & Seybert, 2008), they likely succumb to similar biases to those that we document in this study. Such biases are likely exacerbated when analysts forecast components of earnings before forecasting a bottom-line earnings number
