How Do Analysts Interpret Management Range Forecasts?

Forthcoming at Accounting, Organizations and Society

55 Pages Posted: 3 Jun 2014 Last revised: 5 May 2015

See all articles by Michael (Minye) Tang

Michael (Minye) Tang

Florida International University (FIU)

Paul Zarowin

New York University (NYU) - Department of Accounting

Li Zhang

Rutgers, The State University of New Jersey - Accounting

Date Written: February 10, 2015

Abstract

Range forecasts have evolved to be the most common form of management forecasts. Prior studies typically use the midpoint to evaluate analyst reaction to range forecasts, implicitly assuming that analysts place equal weights on the upper and the lower bounds of management range forecasts. We empirically test this restrictive assumption and provide strong evidence of unequal weights ─ analysts place significantly more (less) weight on the lower (upper) bound of forecast ranges. Moreover, such overweight on the lower bound is more pronounced when analysts face higher ambiguity, consistent with the “max-min” axiom, which predicts that decision-makers tend to assign higher probability to the worst-case scenario when facing ambiguity. Further tests show that “optimal revisions” with perfect foresight of actual earnings also overweight the lower bound.

Keywords: Analyst forecast, management forecast, forecast revision, range forecast

Suggested Citation

Tang, Michael and Zarowin, Paul and Zhang, Li, How Do Analysts Interpret Management Range Forecasts? (February 10, 2015). Forthcoming at Accounting, Organizations and Society, Available at SSRN: https://ssrn.com/abstract=2445572 or http://dx.doi.org/10.2139/ssrn.2445572

Michael Tang (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

Li Zhang

Rutgers, The State University of New Jersey - Accounting ( email )

1 Washington Park, Room 996
Newark, NJ 07102
United States

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