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Forecast Accuracy and Consistent Preferences for the Timing of Information Arrival

Authors/Editors: Hofmann, Christian
Rothenberg, Naomi R.
Published: 2019
Type: Articles in Refereed Journals (International)
Published by: Contemporary Accounting Research, forthcoming

Abstract

We study the effect of accuracy of a forecast about a firm’s cash flows on the timing of recognition. With early recognition, the agent observes and reports a forecast about cash flows prior to his effort choice, making it useful for decision-making. With late recognition, the agent observes and reports the forecast after his effort choice, making it potentially useful for performance evaluation. If the report is verifiable, the principal prefers late recognition when the late forecast is sufficiently biased, or when the early forecast is sufficiently inaccurate. If the report is not verifiable, information rents imply that the principal cannot use the reported forecast as a performance measure. Thus, the accuracy of the late forecast has no effect on the principal’s preference. However, if the accuracy of the early forecast is low and its decision-making function is diminished, similar to a verifiable report, the principal prefers late recognition.