Significance of Forecast Precision: The Importance of Investors' Expectations

39 Pages Posted: 31 Jan 2011 Last revised: 26 Aug 2015

See all articles by Kathy Rupar

Kathy Rupar

Georgia Institute of Technology

Date Written: August 25, 2015

Abstract

I investigate whether alignment between individual investors’ expectations about forecast precision and actual forecast precision affects their estimates of firm value, and whether this relationship is mediated by individual investors’ perceptions of management credibility and future firm growth. Experimental results confirm that when expected and actual forecast precision align, individual investors estimate higher firm stock prices than when expected and actual forecast precision do not align. I also provide evidence of a mediation path through which the misalignment between expected and actual forecast precision affects individual investors’ perceptions of management credibility, future firm growth, and estimates of firm stock price. My findings help reconcile inconsistencies in prior earnings forecast literature and inform managers and researchers about strategies that lead to higher perceptions of management credibility and firm value.

Keywords: Forecast Precision, Forecast Form, Management Credibility, Investor Expectations, Environmental Uncertainty

Suggested Citation

Rupar, Kathy, Significance of Forecast Precision: The Importance of Investors' Expectations (August 25, 2015). Available at SSRN: https://ssrn.com/abstract=1752217 or http://dx.doi.org/10.2139/ssrn.1752217

Kathy Rupar (Contact Author)

Georgia Institute of Technology ( email )

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Atlanta, GA 30308-1149
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