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The Effect of Macro Information Environment Change on the Quality of Management Earnings Forecasts

32 Pages Posted: 24 Aug 2006  

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

Date Written: August 15, 2006

Abstract

The 1990s were characterized by substantial increases in the performance of and investor reliance on financial analysts. Because managers possess superior private information and issue forecasts to align investors' expectations with their own, we predict that managers increased the quality of their earnings forecasts during the 1990s in order to keep pace with the improved forward-looking information provided by financial analysts, upon which investors increasingly relied.

Using a sample of 2,437 management earnings forecasts, we document an increase in management earnings forecast precision, management earnings forecast accuracy, and managers' tendency to explain earnings forecasts in 1993-1996 relative to 1983-1986. Given that these forecast characteristics are linked to greater informativeness and credibility, we also document that the information content of management earnings forecasts, as measured by the strength of share price responses to forecast news, increased in 1993-1996 relative to 1983-1986. As expected, the increased information content of management forecasts primarily occurred for firms covered by financial analysts.

Keywords: Management forecasts, Information environment, Earnings quality

JEL Classification: G29, M41, M45

Suggested Citation

Baginski, Stephen P. and Hassell, John M. and Kimbrough, Michael D., The Effect of Macro Information Environment Change on the Quality of Management Earnings Forecasts (August 15, 2006). Available at SSRN: https://ssrn.com/abstract=926361 or http://dx.doi.org/10.2139/ssrn.926361

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)

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