New Product Introduction and Analyst Forecasts Accuracy: Considering the Effects of Ceo Background Characteristics and Earnings Pressure

This study sets out to explore the impact of new product announcement on the analyst forecasts accuracy, arguing that analysts cast doubt on the uncertain future cash flow after launching a new product, particularly a new-to-the-world product, which causes forecast errors and dispersion among analysts. The uncertain future cash flow – a specific aspect of earnings – after launching a new product will be determinant to analysts’ perception towards their forecasts accuracy because it directly leads to a firm’s financial reporting. Because the uncertain outcome after a new-to-the-world product is not easily relaxed in terms of generating cash flows in the short run to cater for market needs, the dilemma on whether the corporate strategy drastically commercializes new products to generate quick cash flows, which may accelerate a product turning to me-too style, is persecuted by announcing firms. Furthermore, financial analysts per se are outsiders like investors, managerial motives to the announcement of new products may further complicate the degree of information asymmetry, causing agency costs that influence the quality of analyst earnings forecasts. Thus, getting access to sufficient information for earnings forecasts is of great importance to make the accuracy judgments. Therefore, the first aim of this study is to investigate the relationship between new product introductions and analyst forecasts accuracy. As the development of a new product is generally involved in a great deal of information asymmetry because it is not mandatory for announcing firms to disclose the cause and effect, financial analysts have to count on certain reliable messages carried in managerial behavior. In other words, the accuracy of analyst forecasts is urged by investors, thus the evidence on certifying information delivered in new product information is of critical importance. This study further argues that a set of CEOs background characteristics may function as a certifying role to relax the analyst doubts on the uncertainties behind new product announcements. In contrast to certifying role, certain managerial behavior catering for the market may discredit the efforts of new product introductions. In addition, grounded on managerial myopia literature, managers under earnings 表 CM02 共 4 頁 第 3 頁 pressure encounter the trade-off between short-term profits at the expense of shareholders and long-term growth (Osma and Young, 2009) to secure his/her jobs, the uncertainties behind new product introduction thus exacerbate financial analysts’ doubt on information carried in new product introductions. The contribution of this study is twofold. When it comes to new product introduction, the role of analysts is less discussed to a certain point. Conventional wisdom has a number of arguments on how important of new product introductions is to the capital market, however, the judgment of the capital market based upon a firm’s profitability, i.e. earnings, is particularly counting on the intermediary in the market, say financial analysts. Therefore, this study tries to link analyst forecasts which have a great impact on the capital market’s evaluation on announcing firms to new product introductions. The other contribution is that this study tries to propose internal and external factors which can moderate the relationship between new product introductions and earnings forecasts accuracy. Factors that influence the relationship matter with the effectiveness of certifying and monitoring mechanism, the uncertain outcome of new product introductions to the market is thus realized to achieve the accuracy of earnings forecasts.

Project ID:PF10507-0589
External Project ID:MOST105-2410-H182-004