Title

Do Management EPS Forecasts Allow Returns to Reflect Future Earnings? Implications for the Continuation of Management’s Quarterly Earnings Guidance

Publication Type

Conference Paper

Publication Date

6-2008

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.

Keywords

Management forecasts, Future earnings response coefficient (FERC), Earnings guidance, Forecast characteristics

Discipline

Accounting | Corporate Finance | International Business

Research Areas

Corporate Reporting and Disclosure

Publication

Annual Conference of Korean Accounting Association

City or Country

Korea

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