CEO Partisan Bias and Management Earnings Forecast Bias

Abstract

Political science research finds that individuals exhibit partisan bias, which results in unduly favorable economic expectations when their partisanship aligns with that of the US president. We examine whether partisan bias is present in management earnings forecasts, where CEOs have strong incentives to provide high-quality forecasts. We find that firms with CEOs whose partisanship aligns with that of the US president issue more optimistically biased management earnings forecasts than CEOs whose partisanship is unknown or not aligned with that of the US president. Our results suggest that CEOs fall prey to partisan bias, which results in suboptimal forecasting behavior. In cross-sectional analyses, we find that this forecast over-optimism is attenuated when CEOs are of higher ability. Additionally, we find that investors fail to discount the news in forecasts issued by CEOs whose partisanship aligns with that of the US president and that post-forecast abnormal returns are lower for these firms.