Why Do Managers Explain Their Earnings Forecasts?

Abstract

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of * University of Georgia; †Indiana University; ‡Harvard University. We thank Andrea Astill, Ben Ayers, Linda Bamber, Dave Barrett, Neil Bhattacharya, Walt Blacconiere, Christine Botosan, Claire Bush, Jenny Gaver, Ken Gaver, Eric Lie, Laureen Maines, Roger Martin, Marlene Plumlee, Jamie Pratt, Aamer Sheikh, Kimberly Smith, David Upton, Jim Wahlen, Wanda Wallace, Isabel Wang, an anonymous referee, and workshop participants at the University of Utah, Indiana University, the University of Georgia, the University of Missouri, the College of William and Mary, and Louisiana State University for comments on earlier versions of this paper. We also gratefully acknowledge the contribution of IBES International Inc. for providing earnings per share forecast data. These data have been provided as part of a broad academic program to encourage earnings expectations research. unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm-and forecastspecific variables that are often associated with security prices.

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