Examination of the information content of management range forecasts

Abstract

We investigate the significance, direction and accuracy of EPS and sales range forecasts, voluntarily disclosed by management. We explore the information content of these voluntary forecasts by highlighting the information contained within their upper and lower bounds (forecast width), contrary to the previous literature that uses midpoint estimates as an expectation proxy. We use the forecast width to determine manager’s forecasting direction, i.e. optimistic or pessimistic, and we assert it as an ex ante estimate of the forecast error that derives when the actual yearend figures are released. We further explore the forecasting accuracy of management forecasts and present evidence for optimistic versus pessimistic forecasts. Finally we test, whether investors can benefit by utilizing the information that lies within the forecast bounds in predicting future stock returns. We find evidence that range forecasts’ upper and lower limits enclose significant information, i.e. forecast width is a significant number, only for EPS forecasts rather for sales forecasts. Regarding manager’s forecasting direction; we confirm overconfidence (optimistic direction) when managers choose to provide estimates for the EPS figure, rather than when they decide to provide estimates for the sales’ figures. Further, we provide evidence of increased forecast accuracy in the case of pessimistic forecasts, contrary to optimistic forecasts. Finally, the findings indicate a negative and significant association between forecast width and future stock returns in the case of EPS forecasts. Investors can benefit when making investment decisions by treating forecast width as an ex ante forecast error relative to the actual yearend figures, attributed possibly to management uncertainty on future economic prospects.