Implied Confidence in Management Range Forecasts
44 Pages Posted: 16 Dec 2016
Date Written: December 1, 2016
Prior accounting research uses the width of management range forecasts as a measure of managers’ uncertainty about future earnings. However, range forecasts do not provide any information about the likelihood that future earnings will fall within the forecast bounds. The absence of information about forecast confidence is important because without an explicit or implicit confidence level, the width of the range does not necessarily convey information about the uncertainty of future earnings realizations. In this study, we develop a measure of the confidence levels associated with management range forecasts, referred to as implied confidence. We find our measure varies positively with ex-post confidence levels and that it outperforms the use of forecast width and analyst dispersion when predicting the likelihood that realized earnings fall within the forecasted range. Importantly, after controlling for implied confidence, the conditional association between width and ex-post hit rate changes from positive to negative, consistent with the use of forecast width as a proxy for manager-specific uncertainty. We consider several possible determinants of confidence levels and find that managers issue range forecasts with higher confidence levels when they face higher litigation risk and have a longer forecasting history.
Keywords: management range forecast, uncertainty, precision, confidence
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