Do Management Eps Forecasts Allow Returns to Reflect Future Earnings? Implications for the Continuation of Management's Quarterly Earnings Guidance

60 Pages Posted: 17 Jan 2008 Last revised: 17 Apr 2013

See all articles by Jong-Hag Choi

Jong-Hag Choi

Seoul National University - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Yoonseok Zang

Singapore Management University - School of Accountancy

David A. Ziebart

University of Kentucky - Gatton College of Business and Economics

Date Written: October 2009

Abstract

Using 18,253 firm-year observations from 1998 through 2003, we build on literature suggesting that more informative disclosures allow returns to better reflect future earnings, and test whether management earnings per share forecasts and their characteristics influence the future earnings response coefficient (FERC). We find that FERCs are greater for forecasting firms and when forecasts are more frequent or precise. We suggest that more frequent and more precise forecasts assist investors in better predicting future earnings. Importantly, we find that quarterly and short-term forecasts incrementally increase the association between returns and future earnings beyond annual and long-term forecasts; thus, even short-term, quarterly forecasts allow investors to form better expectations about future earnings. This suggests a benefit of quarterly earnings forecasts possibly overlooked in recommendations from the United States Chamber of Commerce, CFA Institute, Business Roundtable Institute for Corporate Ethics, and The Conference Board to eliminate quarterly earnings guidance.

Keywords: Management forecasts, Future earnings response coefficient (FERC), Earnings guidance, Forecast characteristics

JEL Classification: M41, M48

Suggested Citation

Choi, Jong and Myers, Linda A. and Zang, Yoonseok and Ziebart, David A., Do Management Eps Forecasts Allow Returns to Reflect Future Earnings? Implications for the Continuation of Management's Quarterly Earnings Guidance (October 2009). Review of Accounting Studies, Vol. 16, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1439023

Jong Choi

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Yoonseok Zang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

David A. Ziebart

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

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