The Information Content of Management Forecasts: Evidence from Nordic Rights Issues

Sammanfattning: We use a unique data set consisting of the last 20 years of forecasts of future operating performance made by corporate managers in connection with a rights issue on four Nordic stock exchanges. We find that forecasting firms outperform non-forecasting firms in the short run and mid-term. We then show two strong determinants of the forecast accuracy. Firstly, if the stated purpose of the rights issue at hand is a specific investment project, a company is more likely to live up its forecast. Secondly, there is a nonlinear relationship between the forecast accuracy and insider ownership, which is consistent with the trade-off between the incentive alignment and entrenchment effect of insider ownership. However, we find that these variables are uncorrelated with the bias of the forecast. Our interpretation is that the information content of management forecasts depends on the managers’ skills to foresee the future and not on intentional deception, which is effectively discouraged through restrictive listing regulations.