Management Earnings Forecasts and Forward-Looking Statements

Abstract:     
Firms provide a significant amount of forward-looking disclosure to investors. Although quantitative earnings forecasts have been the overwhelming focus of prior research on these disclosures, they represent only a small fraction of forward-looking statements. We use textual analysis to examine managers’ disclosures of forward-looking statements, looking at both earnings-related and non-earnings-related prospective statements. We find that earnings-related forward-looking statements are similar to traditionally-studied (i.e., First Call) earnings forecasts, in terms of both determinants and investor response. However, we show that the vast majority of forward-looking statements do not refer directly to earnings and, more importantly, are significantly different from earnings-related statements. For example, while managers are less likely to issue earnings forecasts and earnings-related forward-looking statements when uncertainty is high, they issue more non-earnings-related forward-looking statements when uncertainty is high. Our results suggest that, contrary to results in prior literature, managers may actually respond to increased investor demand for information by issuing more forward-looking statements, but do so in ways that prior research has overlooked. In short, the well-documented attributes of quantitative earnings forecasts cannot be extended to most forward-looking statements.

Number of Pages in PDF File: 55

Keywords: Earnings Announcements, Voluntary Disclosure, Management Forecasts, Qualitative Disclosures

JEL Classification: D8, M4

working papers series