Getting rivals to back off? Biasing sales forecasts to reduce competition

Abstract

I examine the effect of strategic competition on management sales forecast bias. Strategic complement firms react to a rival’s action by moving in the same direction (e.g., increasing their own sales in response to a rival’s sales increase). Strategic substitute firms react to a rival’s action by moving in the opposite direction. I predict that strategic complement firms will issue pessimistic sales forecasts (i.e., behave less aggressively) and strategic substitute firms will issue optimistic sales forecasts (i.e., behave more aggressively) to induce their respective rivals to compete less aggressively. I find that strategic complement firms issue more pessimistic sales forecasts than strategic substitute firms. I also predict and find that strategic complement (substitute) firms issue more pessimistic (optimistic) forecasts in industries with a greater proportion of firm-specific shocks. In contrast, in industries with a greater proportion of industry-wide shocks, firms competing strongly in strategic complements and substitutes issue more pessimistic forecasts than firms competing weakly in these types.