Does the Midpoint of Range Earnings Forecasts Represent Managers’ Expectations?

48 Pages Posted: 17 May 2012 Last revised: 16 May 2015

See all articles by Will Ciconte

Will Ciconte

University of Illinois at Urbana-Champaign - Department of Accountancy; University of Florida - Fisher School of Accounting

Marcus Kirk

University of Florida - Fisher School of Accounting

Jenny Wu Tucker

University of Florida - Warrington College of Business

Date Written: February 1, 2013

Abstract

The accounting literature has used the midpoint of range forecasts in various research settings, assuming that the midpoint is the best proxy for managers’ earnings expectations revealed in range forecasts. We argue that given managers’ asymmetric loss functions regarding earnings surprises, managers are unlikely to place their true earnings expectations at the midpoint of range forecasts. We predict that managers’ true expectations are close to the upper bound of range forecasts. We find evidence consistent with these predictions in 1996-2010, especially in the recent decade. Despite their role as sophisticated information intermediaries, analysts barely unravel the pessimistic bias that managers embed in range forecasts. Furthermore, we find that the upper bound rather than the midpoint better represents investors’ interpretation of managers’ expectations in recent times. Our study cautions researchers to refine their research designs that use management range forecasts and sheds light on the role of financial analysts in the earnings expectations game.

Keywords: Range forecasts, management earnings forecasts, earnings guidance, voluntary disclosure

JEL Classification: G11, G14, G24

Suggested Citation

Ciconte, Will and Kirk, Marcus and Tucker, Jenny Wu, Does the Midpoint of Range Earnings Forecasts Represent Managers’ Expectations? (February 1, 2013). Review of Accounting Studies, 19(2), 2014: 628-660., Available at SSRN: https://ssrn.com/abstract=2061440 or http://dx.doi.org/10.2139/ssrn.2061440

Will Ciconte

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

University of Florida - Fisher School of Accounting ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Marcus Kirk

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0222 (Phone)

Jenny Wu Tucker (Contact Author)

University of Florida - Warrington College of Business ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

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