The Appeal of Vague Financial Forecasts

Organizational Behavior and Human Decision Processes, 114 (2),179-189

Posted: 27 Dec 2019

See all articles by Ning Du

Ning Du

DePaul University - School of Accountancy and MIS

David V. Budescu

Fordham University - Fordham College at Rose Hill

Marjorie K. Shelley

University of Nebraska at Lincoln - School of Accountancy

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: December 6, 2011

Abstract

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.

Suggested Citation

Du, Ning and Budescu, David V. and Shelley, Marjorie and Omer, Thomas C., The Appeal of Vague Financial Forecasts (December 6, 2011). Organizational Behavior and Human Decision Processes, 114 (2),179-189 , Available at SSRN: https://ssrn.com/abstract=3499375

Ning Du (Contact Author)

DePaul University - School of Accountancy and MIS ( email )

1 E. Jackson Blvd
Chicago, IL 60607
United States
312-362-8308 (Phone)

David V. Budescu

Fordham University - Fordham College at Rose Hill ( email )

United States

Marjorie Shelley

University of Nebraska at Lincoln - School of Accountancy ( email )

445E Howard L. Hawkes Hall
Lincoln, NE 68588-0488
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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