Understanding the Role of Management Earnings Forecast Range

Tyler K. Jensen

Iowa State University - Department of Accounting and Finance

Marlene Plumlee

University of Utah - School of Accounting

August 1, 2013

In this study we examine the association between the range-related news in range management earnings forecasts (MEF) and analyst and investor reactions to those forecasts. Specifically, we examine the role of MEF range news (in terms of both the width and the upper and lower bounds of the range) in explaining the overall information content of those forecasts. After controlling for the MEF earnings-level news, we find that range-width and range-location news is incrementally informative in explaining users’ reactions to the forecasts. Specifically, we find that (1) analysts and investors perceive MEF ranges that are unexpectedly narrow (wide) as good (bad) earnings news and that (2) the upper and lower bounds of the range forecasts provide incremental information. We also examine the interaction between the sign and the magnitude of range-width news and earnings news and document that range-width news is significantly more informative in the presence of negative earnings news. Furthermore, we find users react more strongly to the interaction of bad earnings-level and range-width news, consistent with an asymmetric response to bad news. We also present evidence that changes in the width of the ranges of sequential MEFs provides information incremental to earnings-level and range-width and location news. In addition, we directly examine the prior assumption that MEF point estimates are viewed by analysts and investors as homogenous and infinitely precise. We propose a second type of point MEF where the manager strategically chooses not to disclose a range rather than providing an estimate with a zero range.We find evidence consistent with the existence of two types of point forecasts and show that investors and analysts react more negatively to point forecasts where the range is more likely to be strategically withheld.

Number of Pages in PDF File: 49

Keywords: Management earnings forecasts, point estimates, range-width news, range-location news

JEL Classification: G12, G14, M41

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Date posted: September 1, 2012 ; Last revised: October 9, 2013

Suggested Citation

Jensen, Tyler K. and Plumlee, Marlene, Understanding the Role of Management Earnings Forecast Range (August 1, 2013). Available at SSRN: http://ssrn.com/abstract=2138898 or http://dx.doi.org/10.2139/ssrn.2138898

Contact Information

Tyler K. Jensen
Iowa State University - Department of Accounting and Finance ( email )
College of Business
Ames, IA 50011-2063
United States
Marlene A. Plumlee (Contact Author)
University of Utah - School of Accounting ( email )
1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
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