Forecast Accuracy and Consistent Preferences for the Timing of Information Arrival

Posted: 10 Jun 2019

See all articles by Christian Hofmann

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Naomi Rothenberg

University of Alberta - Department of Accounting, Operations & Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2018

Abstract

We study a principal's choice of whether to produce an imperfect forecast about a firm's outcome either before or after an agent's effort choice. The early forecast affects the agent's effort choice, which means the forecast can also be used to infer information about the effect of the agent's effort on outcome. The late forecast is more accurate because, by working hard, the agent also learns about productivity, implying that the late forecast has an additional performance measurement role. With verifiable information, the principal prefers a late forecast when the agent's effect on the accuracy of the forecast is either large or small. The agent has consistent preferences when his effect on the accuracy of the late forecast is not too large. With unverifiable information, the agent's information rents imply that the principal cannot use either forecast as a performance measure. Thus, the accuracy of the late forecast has no effect on the principal's preference. However, if the accuracy of the early forecast is low and its decision‐making function is diminished, the principal prefers a late signal.

Keywords: principal-agent theory, timing; accuracy

JEL Classification: M41, D82, L20, D80

Suggested Citation

Hofmann, Christian and Rothenberg, Naomi, Forecast Accuracy and Consistent Preferences for the Timing of Information Arrival (December 21, 2018). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3393609

Christian Hofmann (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Naomi Rothenberg

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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