CEOs who are also the founder of their company are less likely to over-exaggerate their forecasts to their existing investors than CEOs who did not found the company, according to new research from Vlerick Business School and KU Leuven.
Veroniek Collewaert, Professor of Entrepreneurship at Vlerick Business School and KU Leuven, and colleagues from Ghent University, University of Exeter, UNSW Business School, and KU Leuven, conducted a series of studies examining how CEOs present their forecasts to their existing investors. Forecasts allow entrepreneurs to present themselves more favourably to investors.
The first study involved the cooperation of a large European venture capitalist and looked at annual financial accounting information and financial predictions for all its portfolio companies. The researchers measured forecast bias by finding the difference between the annual forecasted and realised revenues of each company: the higher the bias, the more exaggerated the forecasting was.
Their findings showed that all entrepreneurs overestimate realised revenues in the next year by an average of 22%, however there is a difference between founder- and non-founder-CEOs. Founder-CEOs tend to overshoot realised revenues by around 15%, while non-founder-CEOs overshoot by 27%.
Professor Collewaert says: “There is a fine line between presenting oneself favourably and outright lying. Entrepreneurs are aware of the potential cost of providing overly-biased forecasts as investors’ value accuracy and credibility. They know investors expect to see high forecasts, but they also know that overpromising and then underdelivering may lead to a loss of trust and credibility.”