The Effect of Macro Information Environment Change on the Quality of Management Earnings Forecasts
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
August 15, 2006
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.
Number of Pages in PDF File: 32
Keywords: Management forecasts, Information environment, Earnings quality
JEL Classification: G29, M41, M45
Date posted: August 24, 2006