Managers’ EPS Forecasts: Nickeling and Diming the Market?
59 Pages Posted: 16 Apr 2009 Last revised: 31 Aug 2009
Date Written: January 7, 2008
This study identifies a new systematic difference between managers’ predictions about the firm’s earnings performance and the firm’s ex post realized results. Over the period 1996 to 2004, nearly half of managers’ voluntarily-issued point forecasts of EPS end in nickel intervals, such as an “even” dollar, a half-dollar, a quarter, a dime, or a nickel amount, whereas only 20% of actual reported EPS end in nickel intervals. The psychology and demography literatures refer to this tendency to provide estimates ending in common intervals as heaping.
If managers’ propensity to heap at nickel intervals were simply a benign response to uncertainty, their nickel forecasts would be less accurate but unbiased. However, managers’ nickel forecasts are not only less accurate; they are also more optimistically biased than their nonnickel forecasts. Moreover, in addition to uncertainty, self-serving opportunism in response to managers’ economic incentives, and efforts to protect the firm’s proprietary information also play incremental roles in explaining managers’ propensity to issue forecasts heaped at nickel intervals.
We find that heaping in management forecasts helps explain the heaping in analysts’ forecasts documented in prior research - even among active analysts who follow the firm on a timely basis. Finally, we show that on balance, investors and analysts adjust for the predictable portion of the bias in managers’ nickel forecasts, and that even after controlling for the predictable bias, investors and analysts place less weight on managers’ nickel forecasts relative to nonnickel forecasts.
JEL Classification: G14, M41
Suggested Citation: Suggested Citation