Sales forecast accuracy and adjustment costs

Managers’ forecasts about future sales are at the core of managerial decision-making. Using a monthly business survey, we study managers’ directional sales forecast accuracy three months ahead. Managers incorrectly predict the direction of sales changes in 42 % of their forecasts. In exploratory analyses, we find that firms with better educated and more tenured CEOs make better forecasts. In our main analyses, we investigate how sales forecast accuracy is related to adjustment costs. We find that SG&A costs increase less per dollar of sales increase in firm-years with high accuracy. The results hold after controlling for different proxies related to long-term cost structure. Accordingly, the empirical evidence is consistent with the explanation that our findings primarily reflect short-term dynamics, wherein SG&A expenses rise disproportionately when firms must make ad hoc adjustments in response to unexpected changes in sales. When focusing on within-firm variation of forecast accuracy, the associations with adjustment costs are only significant for firms with low average accuracy. Additional cross-sectional analyses are consistent with the interpretation that forecast accuracy matters more for larger firms and firms with higher demand volatility. Finally, firms with higher forecast accuracy have a lower cost-to-sales ratio and higher gross profit margins.