Diversified Firms and Analyst Earnings Forecasts: The Role of Management Guidance at the Segment Level
Forthcoming at Journal of International Accounting Research
72 Pages Posted: 4 Jan 2018 Last revised: 10 May 2019
Date Written: March 11, 2019
Using a unique, manually-collected dataset, we are the first to analyze the role that management guidance at the segment level plays for the financial analyst earnings forecasts of diversified firms. About half of the diversified European firms in the sample provide segment-level guidance (SLG), with considerable variation in precision and disaggregation. We find that (1) analyst earnings forecast errors are smaller, and (2) the magnitude of disagreement between individual forecasts and the average forecast is lower for firms that provide SLG, beyond the effect of group-level guidance. The results hold in matched samples and within-firm analyses around SLG initiation. We further show that the results are stronger in situations characterized by higher information asymmetry, but not in situations characterized by operational complexity. Overall, the results imply that SLG mitigates to some extent the difficult task that financial analysts face when valuing diversified companies.
Keywords: Management guidance; Segment disclosure; Financial analysts; Analyst earnings forecasts; Corporate diversification
JEL Classification: M41, L25, G20
Suggested Citation: Suggested Citation