Essay I: Management Forecast Consistency

We posit that management forecasts that are predictable transformations of realized earnings without random errors are more informative than unbiased forecasts which manifest small but unpredictable errors, even if biased forecasts are less accurate. Consistent with this intuition, we find that managers who make consistent forecasting errors have a greater ability to influence investor reactions and analysts’ forecast revisions, even after controlling for the effect of accuracy. This effect is more economically significant and statistically robust than that of forecast accuracy. More sophisticated investors and experienced analysts are found to have a better understanding of the benefits of consistent management forecasts.

Essay II: Biased...[ Read more ]

Essay I: Management Forecast Consistency

We posit that management forecasts that are predictable transformations of realized earnings without random errors are more informative than unbiased forecasts which manifest small but unpredictable errors, even if biased forecasts are less accurate. Consistent with this intuition, we find that managers who make consistent forecasting errors have a greater ability to influence investor reactions and analysts’ forecast revisions, even after controlling for the effect of accuracy. This effect is more economically significant and statistically robust than that of forecast accuracy. More sophisticated investors and experienced analysts are found to have a better understanding of the benefits of consistent management forecasts.

Essay II: Biased Earnings Guidance: Lowballing versus Walk-Down

In this study, we consider two forms of downward-biased managerial earnings forecasts that differ in the timing of their issuance. In lowballing, managers issue pessimistic forecasts at least one quarter ahead of earnings announcements. In walk-down, managers issue pessimistic forecasts less than one quarter before earnings announcements. We find that lowballing has a greater effect than walk-down on analysts’ forecast revisions and on establishing analysts’ expectations at beatable levels. Lowballing also generates greater short- and long-term market premiums associated with meeting and beating analysts’ forecasts than walk-down. Additional analysis reveals that managers who are more capable of processing financial information tend to lowball more frequently. These managers are also less likely to be fired.