CEO Ability and Management Earnings Forecasts

Abstract

Trueman (1986) theorizes that managers voluntarily issue earnings forecasts to signal their ability. Consistent with this theory, we find that the likelihood and frequency of management earnings forecast issuance increase with CEO ability, as proxied by (i) press citations, (ii) a measure generated from data envelope analysis, and (iii) industry-adjusted ROA during a specific CEO’s tenure. We also report that firms with high ability CEOs issue more accurate forecasts compared to firms with low ability CEOs and that the market is more responsive to the news in forecasts associated with higher ability CEOs compared to the news in forecasts associated with lower ability CEOs. These results suggest that CEO ability adds credibility to management forecasts. Overall, our study highlights that a personal characteristic of the CEO is associated with an important voluntary disclosure.