ABSTRACT
We examine whether and how budgetary participation practices affect top managers’ earnings forecasts. Previous research highlights that lower-level managers participating in the budgetary process may try to underestimate budgeted revenues or overestimate budgeted costs to make budgeted targets easier to achieve. This misleads top managers about a company’s true profit potential. This study utilizes management earnings forecasts released by top managers to proxy for their future earnings estimation and empirically tests the research model using data collected through a mail questionnaire survey and archival data on Japanese listed firms. We find that budgetary participation is positively associated with management forecast pessimism. Additionally, this positive association is more pronounced in firms with a stronger link between lower-level manager pay and performance. These results suggest that budgetary participation practices introduce bias into top managers’ earnings forecasts.
Data Availability: The data that support the findings of this study are available from the first author upon request.
JEL Classifications: M41.