The Appeal of Vague Financial Forecasts
Organizational Behavior and Human Decision Processes, 114 (2),179-189
Posted: 27 Dec 2019
Date Written: December 6, 2011
Prior findings suggest that managers often choose ranges to communicate their uncertainty in future earnings. We analyzed earnings forecasts over 11 years to test the association between the precision of management forecasts and the future earnings predictability. Firms with lower earnings predictability are more likely to choose range forecasts over point estimates than their more predictable counterparts, but the forecast imprecision does not increase as earnings predictability declines. We study investors’ attitudes to forecast precision and seek to understand how it affects their decisions. We argue that investors’ evaluations of earnings forecasts can be explained by a sequential non-compensatory two-stage process – First, investors determine whether a point or a range estimate is more appropriate for a particular instance based on the congruence principle. Then, they seek the most precise (narrowest) reasonable range in order to maximize informativeness. Results from three experiments indicate that, as predicted, the preference for (im)precision is non-monotonic – it peaks for low levels of imprecision and diminishes when the range gets wider. This preference for (less precise) narrow range forecasts is consistent with participants’ desire for congruent and informative estimates, and supports the claim that investors favor forecasts that are as precise as warranted by the information available, but not more precise.
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