Determinants of Management Forecast Precision
THE ACCOUNTING REVIEW, 1997
Posted: 30 Oct 1996
Pownall, et. al. (1993) document that nearly 80% of their sample of voluntary management earnings forecasts are not precise point forecasts. Imprecise forecast forms include closed-interval forecasts (i.e., ranges), open-interval forecasts (i.e., minimums and maximums), and general impressions about firms' earnings prospects. Given analytical predictions that a signal's precision is important in belief development (Kim and Verrecchia, 1991; Morse, et al., 1991) and the empirical evidence that management forecast precision affects the beliefs of traders and financial analysts (Baginski, et al., 1993), the question arises as to what factors motivate a manager's choice of forecast precision.We perform cross-sectional logistic regressions to document determinants of forecast precision. Our sample consists of 1,212 annual and interim management forecasts. After controlling for firm-specific and horizon-specific earnings uncertainty, we find that managers produce more precise forecasts of annual earnings for firms with greater analyst following (our proxy for private information) and for smaller firms (our proxy for public information). The results are robust across subsamples. The majority of the results do not, however, hold for interim forecasts.
JEL Classification: M41, M43
Suggested Citation: Suggested Citation