Do management EPS forecasts allow returns to reflect future earnings? Implications for the continuation of management’s quarterly earnings guidance

Do management EPS forecasts allow returns to reflect future earnings? Implications for the... Using 18,253 firm-year observations from 1998 through 2003, we build on literature suggesting that more informative disclosures allow returns to better reflect future earnings and test whether management earnings per share forecasts and their characteristics influence the future earnings response coefficient (FERC). We find that FERCs are greater for forecasting firms and when forecasts are more frequent or precise. We suggest that more frequent and more precise forecasts assist investors in better predicting future earnings. Importantly, we find that quarterly and short-term forecasts incrementally increase the association between returns and future earnings beyond annual and long-term forecasts; thus, even short-term, quarterly forecasts allow investors to form better expectations about future earnings. This suggests a benefit of quarterly earnings forecasts possibly overlooked in recommendations from the United States Chamber of Commerce, CFA Institute, Business Roundtable Institute for Corporate Ethics, and The Conference Board to eliminate quarterly earnings guidance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Do management EPS forecasts allow returns to reflect future earnings? Implications for the continuation of management’s quarterly earnings guidance

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Publisher
Springer US
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-010-9131-6
Publisher site
See Article on Publisher Site

Abstract

Using 18,253 firm-year observations from 1998 through 2003, we build on literature suggesting that more informative disclosures allow returns to better reflect future earnings and test whether management earnings per share forecasts and their characteristics influence the future earnings response coefficient (FERC). We find that FERCs are greater for forecasting firms and when forecasts are more frequent or precise. We suggest that more frequent and more precise forecasts assist investors in better predicting future earnings. Importantly, we find that quarterly and short-term forecasts incrementally increase the association between returns and future earnings beyond annual and long-term forecasts; thus, even short-term, quarterly forecasts allow investors to form better expectations about future earnings. This suggests a benefit of quarterly earnings forecasts possibly overlooked in recommendations from the United States Chamber of Commerce, CFA Institute, Business Roundtable Institute for Corporate Ethics, and The Conference Board to eliminate quarterly earnings guidance.

Journal

Review of Accounting StudiesSpringer Journals

Published: Apr 28, 2010

References

  • The association between outside directors, institutional investors and the properties of management earnings forecasts
    Ajinkya, B; Bhojraj, S; Sengupta, P
  • Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance
    Anilowski, C; Feng, M; Skinner, DJ
  • Market reaction to multiple contemporaneous earnings signals: Earnings announcements and future earnings guidance
    Atiase, RK; Li, H; Supattarakul, S; Tse, S
  • Earnings quality in UK private firms: Comparative loss recognition timeliness
    Ball, R; Shivakumar, L
  • Disclosure level and the cost of equity capital
    Botosan, C
  • A re-examination of disclosure level and the expected cost of equity capital
    Botosan, C; Plumlee, M
  • Do family firms provide more or less voluntary disclosure?
    Chen, S; Chen, X; Cheng, Q
  • Lack of timeliness and noise as explanations for the low contemporaneous return-earnings association
    Collins, DW; Kothari, SP; Shanken, J; Sloan, R
  • Expectations management and beatable targets: How do analysts react to explicit earnings guidance?
    Cotter, J.; Tuna, I.; Wysocki, P. D.
  • Risk, return and equilibrium: Empirical tests
    Fama, EF; MacBeth, JD
  • Discretionary disclosure and external financing
    Frankel, R; McNichols, M; Wilson, P

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