Examining the relationship between management ability and profit forecast by managers

Thesis for Master of Accounting (M.A)

Abstract

Information disclosure is different in different companies. What is discussed in this research is profit prediction. Profit forecasting in Iran is done by managers. Considering the role that managers have in profit forecasting, in this research, the relationship between the manager's ability and the timing of forecast disclosure, frequency of forecasting and forecasting accuracy is considered. The sample examined in the research was selected from among the companies admitted to the Tehran Stock Exchange during the years 1388 to 1392. Logit method was used to test the hypothesis related to the relationship between manager's ability and forecast disclosure, and multiple regression was used to test the hypotheses related to the relationship between manager's ability and frequency of forecasting and prediction accuracy by managers. In this research, ten control variables, percentage of institutional ownership, percentage of non-commissioned managers on the board of directors, company size, sales concentration, loss, increase in income, profit fluctuations, beta, standard deviation from the surplus of the market pattern and the time interval until the disclosure of the forecast on the due date have been considered. In general, the findings of the research show that there is a significant relationship between the ability of the manager and the probability of disclosure of the forecast, the accuracy of the forecast and the frequency of the forecast. As a result, it can be said that the ability of the CEO is effective on the profit forecast by the managers.                                                              

Key words: manager ability, forecast disclosure, forecast frequency, forecast accuracy and profit forecast by managers

- Introduction

Companies are required to announce the expected profit of the company at the time of admission to the stock exchange. Investors use this information for their future decisions. Expected profit loss is very important, because it seems to be a measure of long-term stock returns.                                     

One of the tools of company managers' interaction with the market is to provide information about the company's profit forecast, by which companies can influence the market's behavior. Since many analysts and investors make their decisions according to the available information, and on the other hand, the value of profit forecasts made by managers is higher compared to current profits and the book value of capital (Ota, 2002) and the profits forecasted by management are an important criterion in evaluating companies and influencing the stock price of companies (Kach, 2001), it should be expected that the managers of stock companies are extremely accurate in their forecasts.                                    

According to the research conducted in Iran and related to profit forecasting by managers, most of the past researches refer to forecasting accuracy, forecasting error and reliability of profit forecasting by managers. In this research, we look at profit forecasting by managers from another angle and examine its relationship with the manager's ability. 

In this chapter, we discuss the generalities and framework of the upcoming research, including the topic of the research, the necessity of conducting the research, the objectives of the research, and the hypotheses of the research. The purpose of the first chapter of the research is to provide an overview and a general view of the research plan that the researcher wants, which will be discussed in the following chapters.                                   

1-2- Statement of the problem

Investment is one of the important factors of development in this century. Investment requires planning. Planning provides the possibility of proper exploitation of the available opportunities. To increase the effectiveness of planning, you must improve the ability of correct and continuous forecasting. Forecasting is a key element in economic decision-making. Investors, creditors, management and other people rely on forecasts and expectations in making economic decisions. Also, paying attention to the company's annual budget, forecasting its production, sales and profit per share, and controlling the budget in interim reports and the degree of realization of forecasts, have a significant impact on stock price changes. Perhaps the most important factor affecting the stock price can be found in the prediction of profit per share.The most important source of information for investors, creditors and other users of companies' information is the profit forecasts provided by them in certain time intervals (Thaghafi and Talane 2015, Alavi Tabari and Jalili 2015, Baginski and Hassel 1997). 

According to the fact that users of financial statements use the profit predicted by managers as a criterion for decision making, they should check the profit forecast from different angles. Forecast disclosure, forecast frequency and forecast accuracy are among the things that are considered in this field. One of the factors that can influence the mentioned cases is the manager's ability.                                                                                                               

In this research, using the generalized theoretical model by Truman (1986) as a source for study, the relationship between manager's ability and profit forecast by managers is investigated. It is difficult to observe the manager's ability directly, finally, Truman's theory (1986) has identified criteria for the manager's ability. Experimental work is rarely seen in the tests conducted by Truman. What we are dealing with in this research is the relationship between the manager's ability and the frequency of profit forecasting by managers. In order to evaluate whether the profit forecasting by management brings useful information to the market, the relationship between the manager's ability and the accuracy of profit forecasting by management is evaluated.                                                                                                       

1-3- Objectives of the research

The main objective of the research is to examine the relationship between the manager's ability and the profit forecast by managers in companies listed on the Tehran Stock Exchange. According to the review of the studies that have been conducted in Iran so far in the field of literature related to profit forecasting, no research has been conducted according to the present research. The closest research has investigated the relationship between profit forecasting and forecasting error, or the relationship between profit forecasting and stock prices, as well as the accuracy of profit forecasting by managers. The current research is different from previous researches by using a variable called manager's ability, and it examines the relationship between manager's ability and things such as the probability of forecast disclosure, forecast frequency and forecast accuracy. The special purpose of this plan is as follows: Helping investors, lenders, capital market supervisory bodies, analysts, etc. In evaluating the expected profits of management and realizing the role of the manager's ability in the evaluations. 1-4- The importance and necessity of conducting research Profit as the most important indicator for measuring the performance of an economic unit is one of the accounting topics that has long maintained its special place in theoretical discussions (Khalghi Moghadam and Azad, 2013). Forecasting helps investors to improve their decision making process and reduce the risk of their decisions. Beaver says: "Forecasts can be made without making a decision, but the smallest decision cannot be made without a forecast." There are various methods for predicting the profit of each share, including forecasts by managers and analysts. In 1381, Tehran Stock Exchange, according to Article 5, Clause C of the Information Disclosure Regulations, obliged companies to provide profit forecasts per share at the end of every quarter. The results of most researches show that managers' or analysts' forecasts are more accurate than forecasts based on time series models. In our country, investors either use the forecasts of managers or they make profit forecasts themselves (Mashaikh and Shahrokhi 2016).

Given the importance of forecasting by managers, we investigated the relationship between managers' ability and profit forecasting by them. Truman's model (1986) states that capable managers are better than non-capable managers in predicting future changes in the economy of the company under their influence. In contrast, our criteria for manager ability are more general. and include strategic and operational ability. It is difficult to observe the manager's ability directly.

In fact, using the method of return on assets adjusted by the industry, we examined the relationship between the ability of managers and the probability of disclosure of forecasts and the frequency of profit forecasts by management, as well as the relationship between managers' ability and the accuracy of profit forecasts. In general, our study completes the literature on the relationship between manager's personal characteristics and important company decisions.