Why Do Managers Explain Their Earnings Forecasts?

29 Pages Posted: 7 Jul 2004

See all articles by Stephen P. Baginski

Stephen P. Baginski

University of Georgia - J.M. Tull School of Accounting

John M. Hassell

Indiana University Kelley School of Business Indianapolis

Michael D. Kimbrough

University of Maryland - Robert H. Smith School of Business

Abstract

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm- and forecast-specific variables that are often associated with security prices.

JEL Classification: M41, M45, G12

Suggested Citation

Baginski, Stephen P. and Hassell, John M. and Kimbrough, Michael D., Why Do Managers Explain Their Earnings Forecasts?. Available at SSRN: https://ssrn.com/abstract=548062 or http://dx.doi.org/10.2139/ssrn.548062

Stephen P. Baginski (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

John M. Hassell

Indiana University Kelley School of Business Indianapolis ( email )

801 W. Michigan Street
Indianapolis, IN 46202-5151
United States

Michael D. Kimbrough

University of Maryland - Robert H. Smith School of Business ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States
301-405-8222 (Phone)
301-314-9414 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
92
Abstract Views
3,296
rank
276,301
PlumX Metrics