Differences in forecasting behaviour between large and small firms

Smith, Henry Clay; Herbig, Paul; Milewicz, John; Golden, James E.

doi:10.1108/eum0000000000006

Cited by 9 publications

(12 citation statements)

References 27 publications

(33 reference statements)

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“…Despite its contribution, very few studies consider the accuracy of forecasts in an entrepreneurial context, or the effect this might have on firm performance. Smith, Herbig, Milewicz and Golden, (1996) note a high degree of subjectivity in the forecasts performed by entrepreneurs which they identify as being based upon less complex quantitative forecasting techniques than those used in larger firms. It is suggested (Cassar and Gibson 2007) that this subjectivity and use of less complex techniques can induce entrepreneurs to make forecasts that are too optimistic.…”

Section: Introductionmentioning

confidence: 99%

Entrepreneurial overconfidence and its impact upon performance

Invernizzi

Menozzi

Passarani

et al. 2016

International Small Business Journal

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A hubris theory of entrepreneurship suggests that financial forecasts are often informed by the use of heuristic methods prone to overconfidence. While overconfidence can be advantageous during the start-up phase, it is also linked to overoptimistic forecasts, nonoptimal outcomes and firm failure. This article uses a data set from 203 micro and small firms operating in North West Italy where overconfidence is measured as the difference between budget estimates and actual results for earnings before interest, taxes, depreciation and amortization (EBITDA), owner equity and borrowing costs. These measures are employed to identify the extent of overconfidence by entrepreneurs in their financial forecasts and to analyse any relationship between overconfidence and the characteristics of the entrepreneur and the firm. A probit analysis is employed to investigate any association between overconfident financial forecasts and subsequent firm failure. The results are consistent with the hypotheses, suggesting that the majority of entrepreneurs are prone to overconfident budgetary forecasts that are directly associated with firm failure. Such overconfidence is mitigated by an entrepreneur's level of educational attainment and the use of budgetary controls. 2009). This article investigates the overoptimistic biases in the context of established firms. Considerable literature exists on the potential for entrepreneurs to be overconfident in their expectations of firm performance but the majority of this evidence is derived from self-reported attitudinal surveys. In addition, this literature has offered no empirical evidence that identifies an association between overconfidence and firm performance and only limited information on the attributes of the entrepreneur, or firm, that may lead to such behaviour (Ucbasuran et al. 2010). Using published data on the budget forecasts and actual results made available for 2012 by a unique sample of 203 Italian micro and small enterprises, this article addresses two research questions. Are entrepreneurial orfirm characteristics related to overconfident attitudes as exhibited in the financial estimations of small firms? Is overconfidence associated with a small firm failure? To address these questions, a novel measure for overconfidence is adopted, computed as the variance between actual and estimated values of three economic indicators:EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), equity and borrowing costs, derived from comparisons between a firm's balance sheets and financial forecasts over time. We argue that systematic, inflated financial predictions of firm performance signal overconfidence and we operationalise the overconfidence construct as the difference between budgeted and actual performance (Cassar and Gibson 2007;Markovitch, Steckel, Michaut, Philip and Tracy, 2015).

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Section: Introductionmentioning

confidence: 99%

Entrepreneurial overconfidence and its impact upon performance

Invernizzi

Menozzi

Passarani

et al. 2016

International Small Business Journal

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“…In this study, the firm performance was measured using six indicators, namely "Sales performance" [11], "Growth plan by the firm", "Target achievement", "Profit A Structural Equation Model Linking Forecasting, Planning and Controlling with SME Performance levels met by the firm" [12], "Delivery promptness" and "Lead time reduction" [13]. The use of forecasting was assessed by seven indicators, namely "simplicity", "understandability", "ease of use", "effectiveness", "timeliness", "accuracy" and "overall satisfaction" [14]. Use of planning was measured using nine indicators, based on the degree of planning formalization [15], use of planning instruments, inventory management and goal accomplishment [8].…”

Section: B Selection Of the Indicatorsmentioning

confidence: 99%

“…The content validity was ensured from previous research works [17], [14], and [15]. The construct validity was assessed in terms of face validity, convergent validity, discriminant validity and nomological validity.…”

Section: A Testing the Validity And The Reliability Of The Measuringmentioning

confidence: 99%

A structural equation model linking forecasting, planning and controlling with SME performance

Biju

Bhasi

2014

2014 IEEE International Conference on Industrial Engineering and Engineering Management

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The importance and influence of forecasting, planning and controlling on SME performance are analyzed in this paper. A structural equation model is formed and is tested with a questionnaire survey data, administered among the selected SMEs in India. Forecasting is found the most influencing variable followed by planning and then controlling. The compensating role of planning and controlling on firm performance, when the forecasting is inactive is also revealed. The cross validation explains the distinct pattern of use of forecasting, planning and controlling among the SMEs managed by the professional managers and the conventional owners. The case study discussed in this paper confirms the model based study. The paper suggests the ways for improving the use of forecasting, planning, controlling and firm performance. This model is useful to the researchers for improving the existing models.

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“…L'insuffisance des pratiques d'évaluation et de signalisation de la performance dans les PME 1.1. L'inadaptation des pratiques d'évaluation et de pilotage de la performance dans les PME L'insuffisance de ressources, le manque de temps disponible, la structure de l'entreprise ou le profil des dirigeants constituent un contexte défavorable à la mise en place de méthodes élaborées de pilotage de la performance (Smith et al, 1996 ;Chapellier, 1994 ;Germain, 2005). Confrontées à la complexité d'utilisation de SMGP sophistiqués du type « balanced scorecard » (Kaplan et Norton, 1992 ;Garengo, Biazzo et Bititci, 2005), au manque de compétences requises pour mettre en oeuvre ces outils et à la difficulté d'accéder aux informations nécessaires pour les utiliser de manière optimale, les PME limitent le plus souvent leur analyse à une série d'indicateurs financiers (Laintinen, 1996 ;Hussein, Gunasekaran et Laitinen, 1998 ;Garengo, Biazzo et Bititci, 2005 ;Perera et Baker, 2007).…”

Section: Introductionunclassified

Un outil de mesure et de signalisation de la performance au service de l’analyse stratégique dans la PME

Brulhart

Gherra

Rousselot

2010

ipme

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Le caractère limité des ressources des PME et le faible recours à des systèmes formels de contrôle sont à l’origine de pratiques incomplètes, partielles et dispersées en matière d’évaluation et de suivi de la performance. Or, l’absence ou l’insuffisance de système de mesure et de gestion de la performance (SMGP) obère à la fois la capacité du propriétaire-dirigeant à porter une analyse pertinente sur la situation de son entreprise et sa capacité à échanger et/ou négocier avec les différentes parties prenantes (banques, investisseurs, fournisseurs, etc.). Fort de ce constat, cet article vise à proposer un modèle simple et complet d’évaluation et de signalisation de la performance, adapté à la situation des PME ne disposant pas des moyens de mettre en oeuvre de manière systématique une approche plus sophistiquée. Ce modèle peut être utilisé comme un outil d’aide à la décision pour les PME ou leurs conseils de même que comme un outil d’échange et de négociation avec les partenaires externes de l’entreprise. Construit sur la base d’un « modèle DuPont enrichi », le modèle présenté met ainsi l’accent sur six déterminants de la valeur pour les associés de la PME. Il se construit sur la base de cinq équations successives visant à approfondir progressivement la compréhension de la formation de la performance de l’entreprise en lien avec les pratiques et le positionnement stratégiques de la firme.

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Differences in forecasting behaviour between large and small firms

Cited by 9 publications

References 27 publications

Entrepreneurial overconfidence and its impact upon performance

Entrepreneurial overconfidence and its impact upon performance

A structural equation model linking forecasting, planning and controlling with SME performance

Un outil de mesure et de signalisation de la performance au service de l’analyse stratégique dans la PME

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