CAN FIRM GOVERNANCE EXPLAIN THE DIFFERENCES THAT EXIST BETWEEN SALES AND EPS FORECAST ERRORS?

This study explores the differences that exist between sales and EPS forecast errors in a corporate governance’s perspective. We hypothesize that analysts have a harder time to forecast sales than EPS because firms have a greater ability to control EPS than sales figures. We also hypothesize the difference in absolute forecast error of sales and EPS is larger in weak governance firms, as these firms may tend more often to manipulate their earnings. We employ four variables as proxies of corporate governance: the number of analysts, market capitalization, institutional ownership percentage and years since IPO. We find that the better the corporate governance, the more accurate are analysts’ sales and EPS forecasts. Consistent with the idea that sales are much harder to manipulate, we find that firm with better governance has a smaller difference between the two measures of error. Overall, these results are new and may have important implications for better understanding the governance environment of firms.