Meeting or Beating Management Forecasts: Implications for Managerial Talent

Abstract

This study explores whether meeting or beating management forecasts is indicative of managerial talent. We find that the market reacts positively when firms meet or beat their management forecasts after controlling for meeting or beating analyst forecasts and management forecast errors. Further analyses reveal that firms meeting or beating management forecasts perform better in the future and are more likely to retain their CEOs. These findings suggest that meeting or beating management forecasts provides information on managerial talent, which is valued by investors. Next, we examine when management forecasts are distinct from analyst forecasts with respect to their indication of managerial talent. We find that the market premiums from meeting or beating management forecasts are positively associated with both firm-specific uncertainty and managers’ firm-specific information advantages, while the market premiums from meeting or beating analyst forecasts are positively associated with analysts’ macro-level information advantages.