Measuring News in Management Range Forecasts

Abstract

Management earnings forecasts expressed as a range have become the most common form of quantitative management guidance. Traditionally, the proxy for the sign and the magnitude of the information conveyed by these forecasts—the forecast news—is calculated as the difference between a pre‐forecast earnings expectation and the midpoint of the forecasted range. We provide strong evidence that this traditional measure understates the amount of information conveyed by range forecasts. More importantly, we demonstrate that information conveyed by the upper and lower bounds of the forecasts can be used to improve the classification of forecasts as conveying good or bad news and for calculating the magnitude of that news. We rely on these findings to suggest alternative methods of classifying management range forecasts as conveying good versus bad news and to refine the calculation of forecast news to include the broader information set. Our analysis also suggests that the information conveyed by the range when the forecasts are bundled (issued concurrent with an earnings announcement) is significantly different than when forecasts are not bundled. Overall, our study documents the importance of incorporating range‐related information when assessing the sign and the magnitude of the information conveyed by management range forecasts.

The Accuracy and Informativeness of Management Earnings Forecasts: A Review and Unifying Framework*

“…In recent years, quantitative range forecasts bundled with current earnings announcements have become the predominant type of forecast (Jensen and Plumlee 2020; Rogers and Van Buskirk 2013). Jensen and Plumlee (2020, 1687) suggest that the “information conveyed by the upper and lower bounds of the [range] forecasts can be used to improve the classification of forecasts as conveying good or bad news and for calculating the magnitude of that news.” Bundled forecasts provide more transparency and allow a direct assessment of prior MFEs. As a result, they increase the detectability of intentional management bias, adding more credibility and informativeness to projected news.…”

“…Therefore, managers' earnings projections help financial analysts improve the quality of their forecasts and significantly influence the timing and accuracy of AFs. The deviation between the news conveyed by the MF and preexisting analyst consensus forecast is correlated with the likelihood of AF revisions around the MF disclosure (Jensen and Plumlee 2020). Kim and Song (2015) find that stock price adjustments to AF revisions disappear when controlling for MFs.…”

“…MFs in T1 also affect AFs published in T2 (Ota 2010; Kim and Song 2015). The likelihood of AF revisions around MF disclosures increases with the deviation between the news conveyed by MFs and the preexisting analyst consensus forecasts (Jensen and Plumlee 2020). The interpretation and evaluation of MF information by financial analysts depend on the underlying forecast antecedents and discrepancy between MFs and analysts' private information about a company's future performance (Kim and Song 2015).…”

“…Healy and Palepu (2001) review the financial disclosure literature and find that MFs are mostly provided in the form of point and range estimates of revenues and earnings. In recent years, quantitative range forecasts bundled with current earnings announcements have become the predominant type of forecast (Jensen and Plumlee 2020; Rogers and Van Buskirk 2013). Jensen and Plumlee (2020, 1687) suggest that the “information conveyed by the upper and lower bounds of the [range] forecasts can be used to improve the classification of forecasts as conveying good or bad news and for calculating the magnitude of that news.” Bundled forecasts provide more transparency and allow a direct assessment of prior MFEs.…”

“…The literature shows that MFs affect subsequent AFs, which in turn affect investor response (Ota 2010; Kim and Song 2015). The likelihood of AF revisions around MF disclosures increases with the deviation between the news conveyed by MFs and pre‐existing analyst consensus forecasts (Jensen and Plumlee 2020). Beaver et al (2008) analyze the share price effect of AFEs and find that quarter‐ahead forecast revisions, year‐ahead forecast revisions, and the magnitude of AFEs significantly affect a firm's stock price development.…”