How do analysts interpret management range forecasts?

Measuring News in Management Range Forecasts

“…While this process facilitates the comparison of management forecasts of different forms, it also limits the ability to capture different sources of news. Finally, given the evidence of Rogers and Van Buskirk () among others (e.g., Ciconte et al ; Tang et al ; Tang and Zhang ), we expect the additional information conveyed via the range to be differentially impactful in certain forecasting situations (when forecasts are bundled or unbundled) or when interpreted by different types of users (analysts or investors).…”

“…Their study also suggests that analysts, but not investors, fail to update their expectations to reflect the managers' “true” expectations, resulting in an increased likelihood that firms will meet/beat analyst expectations. In a complementary study, Tang et al () investigate whether “analysts place equal weights on the upper and the lower bounds of range forecasts” (48). Relying on the psychology literature around benchmarking and decision‐making models that suggest “ambiguity‐averse agents tend to assign high probability to the worst‐case scenario” (49), Tang et al argue that analysts are likely to consider both the upper and the lower bound as alternative managerial expectations when evaluating range forecasts.…”

“…Furthermore, they suggest that investors' reactions are consistent with them interpreting MRFs as a forecast near the upper bound, while analysts respond more to the midpoint. In a related study, Tang et al () find that analysts appear to overweight the lower bound of the forecasted range relative to the upper bound when revising their forecasts. Other studies have shown that the forecast range conveys information, beyond the midpoint of that range (e.g., Baginski et al ; Clement et al ).…”

“…We begin by reexamining the efficacy of relying on a single point when attempting to determine the forecast news associated with an MRF and show how incorporating range‐related information improves our understanding of how users view the information that MRFs convey. In this way, our study has both a different objective and a broader focus compared to some of the more recent related literature (e.g., Ciconte et al ; Tang et al ). Rather than trying to determine the most likely “location” of the manager's expectation (as in Ciconte et al) or assessing the relative weights analysts place on either the upper or lower bound of a range forecast (as in Tang et al), we allow for a more nuanced view, in which multiple aspects of the range forecasts provide information.…”

“…Since the early 2000s and the adoption of Regulation Fair Disclosure (Reg FD), the majority of quantitative management forecasts have been issued in the form of a range (management range forecasts, MRFs hereafter). Ciconte et al (), Tang et al (), and Hribar et al () report that about 80 percent of the quantitative annual and quarterly forecasts issued during their sample periods are MRFs. We find that 82.2 percent of forecasts issued between 2001 and 2015 are MRFs.…”