The Relation between Internal Forecasting, Misreporting, and the Importance of Meeting Performance Benchmarks

We examine the relation between the importance for firms to meet external performance benchmarks and the role of internal forecasting and misreporting for increasing the likelihood of meeting benchmarks. Drawing on survey data from investment centers, we hypothesize and find that the importance of meeting benchmarks is positively associated with the sophistication of firms’ internal forecasting, and misreporting. We next examine the relation between internal forecasting and misreporting, and find that one standard deviation increase in the sophistication of internal forecasting is associated with a 28% decrease in misreporting. The results suggest that firms with more sophisticated internal forecasting engage in less end-of-year misreporting. We contribute to the literature by studying attributes of firms’ internal forecasting as part of firms’ internal information environment. The paper specially speaks to the planning and coordination role of budgeting and forecasting, as opposed to the relatively more extensively studied evaluation and incentive role.