Environmental System, CEO Ability And Management Earnings Forecasts

Management earnings forecasts is a kind of forward-looking information aboutearnings which is announced voluntarily by firms’ management layer beforeperiodically issuing financial reports. Today, there are many researches onmanagement earnings forecasts at home and abroad, but the research on theincentives of issuing management earnings forecasts still has a long way to go.This kind of incentive research has been carried out by foreign expertise formany times and it has already formed a theoretical system, those most famous onesinclude Penman (1980), whose signaling hypothesis thinks that management usuallyannounce earnings forecast by the motivation of eliminating information asymmetry;while Healy and Palepu found that the incentives can be grouped into6kinds. InChina, it has been validated that issuing earnings forecast has motivations. Previousstudies have focused on expanding the scope of financing, chasing managers’interest, enhancing corporate value and other aspects, but there has no studiesconsidering the macro-institutional environment of china which may put impact onthe incentives of issuing management earnings forecasts, nor the role thatgovernment intervention play in this process, even studies on the relationship ofCEO ability and management earnings forecast are very little.This paper is based on the manager’s ability information signaling theory ofTrueman (1986). It mainly studies the relationship between CEO ability andmanagement earnings forecasts while considering the macro-environment and thenature of property rights of listed corporate in China.According to the manager’s ability information signaling theory, managers arelikely to issue earnings forecast in order to prove their ability of realizing changesabout firms’ environment, which means that the incentive of issuing earningsforecasts may be from a wanting of signaling ability. It can be inferred that thequality of management earnings forecasts (it’s issuing frequency and precision) hasthe information of CEO ability. In China, the environmental system is different fromother countries, is the deduction applies to China’s corporate? This paper studies the relationship between CEO ability and managementearnings forecast from the perspective of environmental system, and groups all listedfirms into state-owned firms and non state-owned ones, which is a new perspective.