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

Abstract

This paper synthesizes the literature on management earnings forecasts (MFs) and adaption mechanisms, combines existing theories into a unifying framework, and discusses the primary determinants of MF accuracy and informativeness. The proposed model refines existing theories by emphasizing the dynamics and multiperiod interactions among firm management, financial analysts, and investors, thereby simplifying the assessment of the complex relations within the forecast cycle. Furthermore, we analyze when and to what extent financial analysts and investors anticipate bias and misleading information. Overall, the literature review provides strong support for a positive correlation between the extent and credibility of MFs, on the one hand, and stock returns, share liquidity, and analyst coverage, on the other hand. Earnings forecasts tend to be optimistically biased, with a positive correlation with forecast uncertainty, earnings flexibility, financial distress, investor sentiment, and the share price dependency of managers' remuneration. Firm growth, legal liability, and litigation risk are significantly associated with forecast pessimism. We also find that MF accuracy increases with previous forecast accuracy, firm size, analyst coverage, analyst agreement, management qualifications, and corporate governance level. Moreover, investors do not anticipate the full extent of predictable forecast bias, leading to systematic share price drifts after the announcement of earnings forecasts and actual earnings. The study's results have substantial implications for researchers, firm managers, investors, financial analysts, and regulators. Although managers may enhance their forecasts' credibility by providing precise, bundled, and disaggregated forecasts, external stakeholders should carefully analyze forecast antecedents and characteristics to assess the direction and magnitude of expected MF bias.

Management earnings forecast and technical innovation: the mediating effects of cost of debt

“…We are motivated to undertake this study for the following reasons. Firstly, consistent with the signaling and agency theory, studies suggest that management earnings forecasts will mitigate information asymmetry (Dutta & Gigler, 2002;Hsieh, Song, Wang, & Wang, 2019;Preussner & Aschauer, 2022). However, the existing studies have focused on voluntary forecasts (Jog & McConomy, 2003;Waymire, 1986).…”

“…Management earnings forecasts enable firms to open up credible communication channels with market participants and maintain a good information environment, enabling firms to mitigate asymmetric information (Preussner & Aschauer, 2022). In line with the signalling theory (Spence, 1973), the credibility of disclosure and its relevance in reducing asymmetric information may be influenced by the frequency of the signal sent (Ajinkya & Gift, 1984;Gonedes, Dopuch, & Penman, 1976;Maslar, Serfling, & Shaikh, 2021).…”