Does Management Earnings Forecast Precision Matter?

Abstract:     
In this study we examine two management earnings forecast precision-related questions. First, we examine the role of unexpected management earnings forecast precision in explaining the overall information content of those forecasts. Specifically, we incorporate a “range news” measure (similar to the earnings news measures commonly employed in management earnings forecast studies) in our analysis, which captures the unexpected aspect of the precision. Theory suggests that information content is a function of prior beliefs, which would include an expectation of forecast precision when examining management earnings forecasts. We also examine the interaction between earnings-level and precision-related news and consider the importance of changes in management earnings forecast precision in understanding those forecasts. Second, we directly examine the implicit notion that management earnings forecast point estimates are more precise than range estimates. We rely on theoretical studies that consider forecasts as having two components, an earnings-level estimate and a range around that earnings-level. We hypothesize and find that, in some cases, management earnings forecast point estimates appear to be viewed as less precision forecasts than range estimates. Furthermore, point forecasts also appear to be viewed as ‘bad’ earnings-level news in certain instances, consistent with point forecasts being viewed as less rather than more precise than range forecasts.

Number of Pages in PDF File: 39

Keywords: Management earnings forecasts, precision, point forecasts

JEL Classification: G12, G14, M41

working papers series