“A Smooth Sea Never Made a Skilled Sailor”: How High Ability Management Use Contemporaneous Verification of Precision to Enhance the Credibility of Revenue Forecasts During Times of Heightened Uncertainty

54 Pages Posted: 21 Jul 2020 Last revised: 14 Apr 2021

See all articles by Kristian Hursti

Kristian Hursti

Aalto University, School of Business

Date Written: July 2, 2020

Abstract

Prior research concludes that supplementary statements improve management forecast credibility especially during heightened uncertainty. However, little attention has been paid to the legitimacy of the connection between the hard forecast and the supporting detail, and no attention to whether the legitimacy of this connection affects forecast accuracy and analyst reactions in these conditions. Focusing on revenue forecasts, this study shows that when the precision of the supporting detail agrees with the precision of the hard forecast in a crisis setting, the odds that the forecast meets its target multiply. In contrast, sign agreement between the supporting detail and the hard forecast in general is found to be unrelated to revenue forecast accuracy in this setting. Furthermore, analyst revisions are depressed by precision agreement. In these conditions, also sign agreement is negatively related to analyst revisions for growth forecasts, adding to prior studies which argue for the predictive ability of positive tone in more normal conditions. Overall, these findings expand Trueman’s (1986) signaling theory by suggesting that management do not signal their ability to predict performance only by releasing a forecast but also by releasing supporting data that are adequately precise to justify the forecast claim.

Keywords: forecast accuracy, analyst revision, linguistic tone, precision, argumentation

JEL Classification: G14, D82, M41

Suggested Citation

Hursti, Kristian, “A Smooth Sea Never Made a Skilled Sailor”: How High Ability Management Use Contemporaneous Verification of Precision to Enhance the Credibility of Revenue Forecasts During Times of Heightened Uncertainty (July 2, 2020). Available at SSRN: https://ssrn.com/abstract=3636964 or http://dx.doi.org/10.2139/ssrn.3636964

Kristian Hursti (Contact Author)

Aalto University, School of Business ( email )

Espoo
Finland

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