Does the midpoint of range earnings forecasts represent managers’ expectations?

Does the midpoint of range earnings forecasts represent managers’ expectations? The accounting literature has used the midpoint of range forecasts in various research settings, assuming that the midpoint is the best proxy for managers’ earnings expectations revealed in range forecasts. We argue that given managers’ asymmetric loss functions regarding earnings surprises, managers are unlikely to place their true earnings expectations at the midpoint of range forecasts. We predict that managers’ true expectations are close to the upper bound of range forecasts. We find evidence consistent with these predictions in 1996–2010, especially in the recent decade. Despite their role as sophisticated information intermediaries, analysts barely unravel the pessimistic bias that managers embed in range forecasts. Furthermore, we find that the upper bound rather than the midpoint better represents investors’ interpretation of managers’ expectations in recent times. Our study cautions researchers to refine their research designs that use management range forecasts and sheds light on the role of financial analysts in the earnings expectations game. Review of Accounting Studies Springer Journals

Does the midpoint of range earnings forecasts represent managers’ expectations?

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Springer US
Copyright © 2013 by Springer Science+Business Media New York
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
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