Disaggregation and the Quality of Management Earnings Forecasts

50 Pages Posted: 20 Sep 2008

See all articles by Clara Xiaoling Chen

Clara Xiaoling Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Rajib Doogar

University of Washington, Bothell

Laura Yue Li

University of Illinois at Urbana-Champaign

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: September 19, 2008

Abstract

In recent years, a substantial percentage of managers voluntarily choose to provide disaggregated earnings forecasts, i.e., earnings forecasts supplemented with additional numerical forecasts for other line items on the income statement. We examine whether such disaggregation yields higher-quality (i.e., more accurate and less biased) management earnings forecasts, and whether market reactions to disaggregated vs. aggregated forecasts are consistent with the quality of these forecasts. We find that: (1) for good news forecasts, earnings forecasts with disaggregated information are no different from aggregated earnings forecasts in either bias or accuracy; (2) for bad news forecasts, earnings forecasts with disaggregated information are significantly less accurate and, on average, more optimistic than aggregated earnings forecasts; 3) stock market reactions to disaggregated good news forecasts are no different from stock market reactions to aggregated good news forecasts, but stock market reactions to disaggregated bad news forecasts are more negative than stock market reactions to aggregated bad news forecasts. Taken together, our results suggest that disaggregated earnings forecasts are no better than and sometimes even worse than aggregated earnings forecasts and that investors anticipate and adjust for the biases associated with disaggregation in management earnings forecast.

Keywords: Management earnings forecasts

JEL Classification: M41, M45, G12

Suggested Citation

Chen, Clara Xiaoling and Doogar, Rajib and Li, Yue Laura and Sougiannis, Theodore, Disaggregation and the Quality of Management Earnings Forecasts (September 19, 2008). Available at SSRN: https://ssrn.com/abstract=1270844 or http://dx.doi.org/10.2139/ssrn.1270844

Clara Xiaoling Chen

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

1206 South Sixth Street
Champaign, IL 61820
United States

Rajib Doogar

University of Washington, Bothell ( email )

18807 Beardslee Boulevard
Box 358584
Bothell, WA 98011-1712
United States
(425) 352-3332 (Phone)

Yue Laura Li (Contact Author)

University of Illinois at Urbana-Champaign ( email )

283 Wohlers hall 1206 South Sixth Street
1206 South Sixth Street
Champaign, IL 61820
United States
2172655086 (Phone)

Theodore Sougiannis

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

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

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