Does the midpoint of range earnings forecasts represent managers’ expectations?
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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.
KeywordsRange forecasts Management earnings forecasts Earnings guidance Voluntary disclosure
JEL ClassificationG11 G14 G24
We thank Rajiv Banker, Larry Brown, Dmitri Byzalow, Michael Drake, David Folsom, Joost Impink, Stephen Penman (editor), Kathy Rupar, Michael Tang, Angie Wang, an anonymous referee, and the participants at the 2012 AAA Annual Meeting, the University of Florida Accounting Brown Bag, and the University of Temple Accounting Workshop. Marcus Kirk thanks the Luciano Prida Professorship Foundation, and Jennifer Tucker thanks the J. Michael Cook/Deloitte Professorship Foundation for financial support.
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