The Credibility of Management Earnings Forecasts for Firms that Meet or Beat Analysts’ Forecast Benchmarks

30 Pages Posted: 6 Jan 2021

See all articles by Daniel M. Bryan

Daniel M. Bryan

State University of New York (SUNY) - Accounting & Law

KC Rakow

Loyola University of Chicago

Samuel L. Tiras

Indiana University - Kelley School of Business

George Wilson

Valdosta State University - Department of Accounting and Finance

Date Written: October 2020

Abstract

Based on Graham et al.’s (2005) survey, CFOs believe financial performance impacts the credibility of their forecasts. We examine this link by testing whether management earnings forecasts (MEFs) of firms meeting/beating analysts’ forecast benchmarks exhibit greater credibility than MEFs of firms missing these benchmarks, based on the informativeness of forecast news. We find for meet/beat firms, the association of forecast news with cumulative abnormal returns is stronger than for miss firms, thus providing evidence of the credibility meeting/beating forecasts provides, but the difference diminishes when firms narrowly beat their benchmarks. Finally, we test whether meet/beat firms use the increased credibility to provide credible guidance about future performance, finding that the association of forecast news with forecast errors is smaller for meet/beat firms than for miss firms, which supports the beliefs of the CFOs surveyed in Graham et al. (2005) that meeting/beating AF benchmarks increases the credibility of their forecasts.

Keywords: Managerial credibility, Managerial earnings forecasts, Forecast News, Meet/beat analyst forecast benchmarks, Analysts’ forecast errors

JEL Classification: M41

Suggested Citation

Bryan, Daniel M. and Rakow, KC and Tiras, Samuel L. and Wilson, George, The Credibility of Management Earnings Forecasts for Firms that Meet or Beat Analysts’ Forecast Benchmarks (October 2020). Available at SSRN: https://ssrn.com/abstract=3738424 or http://dx.doi.org/10.2139/ssrn.3738424

Daniel M. Bryan

State University of New York (SUNY) - Accounting & Law ( email )

Buffalo, NY 14260
United States

KC Rakow

Loyola University of Chicago ( email )

25 East Pearson Street
Chicago, IL 60611
United States

Samuel L. Tiras (Contact Author)

Indiana University - Kelley School of Business ( email )

801 W. Michigan Street
Indianapolis, IN 46202
United States
(317) 274-3420 (Phone)

George Wilson

Valdosta State University - Department of Accounting and Finance ( email )

College of Business Administration
Valdosta, GA 31698
United States

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