Management Sales Forecasts and Firm Market Power

Abstract

Managers deciding whether to issue sales forecasts face a different cost-benefit trade-off than when deciding to issue the more commonly studied earnings forecasts because sales forecasts provide investors and competitors with a more transparent signal of a firm’s short-term demand information and the actions it will take in the product market. We provide evidence demonstrating that sales forecasts contain information about future sales that is incremental to earnings forecasts. We then investigate whether a firm’s market power relative to competitors within its product market affects managers’ decisions to issue sales forecasts and what effect market power has on the accuracy of these forecasts. We proxy for market power using market share and excess price-cost margin, two measures that directly relate to the sales forecasts we study. Controlling for industry-level effects, we find evidence that higher firm market power, as measured by excess margin, is associated with a higher likelihood of issuing sales forecasts. Higher excess margin is also associated with better forecast accuracy on average. Overall, our findings are consistent with higher-market-power firms being more willing to provide sales forecast information to investors through public disclosures.