Economic Downturns and the Value of Management Earnings Forecasts
57 Pages Posted: 14 Jul 2019
Date Written: July 12, 2019
We examine how the state of the economy affects the extent to which investors value management earnings forecasts. We find that stock price reactions to news conveyed in management earnings forecasts are larger during economic downturns, as measured by quarters of negative U.S. GDP growth, NBER recession periods, and periods following negative market-wide stock returns. We also find that analysts make larger revisions to their forecasts in response to news in management earnings forecasts during downturns. Supporting the notion that the higher value investors and analysts place on management forecasts in downturns is justified, we show that management forecasts become even more accurate relative to analyst forecasts during these periods. Overall, these results are consistent with the hypothesis that because adverse economic conditions lower the precision of market participants’ beliefs about a firm’s value, investors and analysts value management-provided information more in downturns.
Keywords: Management Forecasts, News, Analysts, Reactions, Downturns
JEL Classification: G12, G14, M40, M41
Suggested Citation: Suggested Citation