document(1).pdf - ACCOUNTING HORIZONS Vol 32 No 3 September 2018 pp 49–70 American Accounting Association DOI 10.2308/acch-52113 Information

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ACCOUNTING HORIZONS American Accounting Association Vol. 32, No. 3 DOI: 10.2308/acch-52113 September 2018 pp. 49–70 Information Technology Capability, Management Forecast Accuracy, and Analyst Forecast Revisions Feiqi Huang Rutgers, The State University of New Jersey, Newark He Li Southwestern University of Finance and Economics Tawei Wang DePaul University SYNOPSIS: Prior literature has firmly established the relationship between IT capability and firm performance. In this paper, we extend the research in this field and investigate (1) whether IT capability contributes to management forecast accuracy, and (2) whether IT capability improves the informativeness of management forecasts and enhances the extent to which analysts incorporate management forecasts in their revisions. Using firms listed on InformationWeek 500 as our high IT capability group, we empirically demonstrate that firms with high IT capability are able to increase management forecast accuracy, and that analysts incorporate more information from management forecasts in their revisions if the firm has high IT capability. Keywords: information technology capability; management forecast; analyst forecast. INTRODUCTION A firm’s information technology (IT) capability is defined as ‘‘ its ability to mobilize and deploy IT-based resources in combination or co-present with other resources and capabilities ’’ ( Bharadwaj 2000 , 171). Prior research demonstrates that the effective use of IT resources can boost firm performance and increase firm value ( Muhanna and Stoel 2010 ; Santhanam and Hartono 2003 ; Shin 2006 ). For instance, IT capability creates firm value by generating unique competitive advantages ( Santhanam and Hartono 2003 ) and enhancing information management capability ( Mithas, Ramasubbu, and Sambamurthy 2011 ). Firms with high IT capability achieve higher levels of firm-specific abnormal earnings ( Chen, Lim, and Stratopoulos 2011 ), and are capable of faster recovery from loss because of high organizational flexibility and the ability to evolve and change with their customers and suppliers ( Brynjolfsson and Hitt 2000 ). Though IT capability may contribute to effective and efficient internal controls, and affect management’s ability to develop and maintain a sound control environment ( Alles, Kogan, and Vasarhelyi 2002 ; Chen, Smith, Cao, and Xia 2014 ), or to improve information management capability ( Mithas et al. 2011 ), little is known about whether IT capability can enhance management’s ability to extract or integrate information, which in turn affects management’s predictions of firms’ performance, or so-called management earnings forecasts. Management earnings forecasts are voluntary managerial disclosures about earnings before the expected reporting date of earnings ( King, Pownall, and Waymire 1990 ). Issuing earnings forecasts is an important channel that managers use to convey information to investors ( Cheng, Luo, and Yue 2013 ). Accurate management forecasts, which rely on the effectiveness and efficiency of management information systems, reduce information asymmetry ( Coller and Yohn 1997
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