Why Do Firms Forecast Earnings for Multiple Years Simultaneously?

49 Pages Posted: 7 Nov 2020

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Caroline Lee

Temple University - Fox School of Business and Management

Date Written: September 9, 2020

Abstract

By issuing earnings forecasts for both current and future years simultaneously, managers provide the multi-year data required for many valuation models and help investors sort out transitory and permanent shocks. We find that firms that are overpriced and have more transitory earnings tend to issue multi-year forecasts simultaneously. Overpriced firms are more likely to issue both short- and long-term bad news than only short-term bad news forecasts. Mis-pricing tends to be corrected after firms’ multi-year forecasts, especially when overpriced firms issue both long- and short-term bad news forecasts. We also find a more linear current period earnings–return relation when firms issue multi-year forecasts, which suggests that investors under-react less to extreme news because the future year forecasts embed earnings persistence information.

Keywords: multi-year forecasts; management guidance; bundled disclosures; mis-pricing

JEL Classification: D82; D83; G12; M40

Suggested Citation

Basu, Sudipta and Lee, Caroline, Why Do Firms Forecast Earnings for Multiple Years Simultaneously? (September 9, 2020). Available at SSRN: https://ssrn.com/abstract=3691714 or http://dx.doi.org/10.2139/ssrn.3691714

Sudipta Basu (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Caroline Lee

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
103
Abstract Views
602
rank
324,812
PlumX Metrics