Management Forecasts and the Market’s Earnings Expectations

Abstract

This study investigates the relation between management forecasts and earnings expectations. Whereas the extant literature typically associates management forecasts with analysts’ forecasts, a proxy for the market’s earnings expectations, this study decomposes analysts’ forecasts into errors that can be predicted on an out-of-sample basis and into residual, unpredicted forecasts that better proxy for earnings expectations. I show that firms’ propensity to issue management forecasts is related to unpredicted errors in analysts’ forecasts that were issued prior to the management forecast, but do not find evidence of an association with analysts’ predictable errors. In addition, the market puts less weight on analysts’ predictable forecast errors when it reacts to the news in management earnings forecasts. Results are robust to the method used to predict analysts’ forecast errors and to controls for selection bias.