Once is Not Enough: The Determinants and Consequences of Management Updates of Annual Forecasts

Abstract

About half of managers’ forecasts of annual earnings issued in recent years are updated regularly (i.e., updated every quarter), while only about 10% are not updated. Consistent with the dynamic disclosure theory that anticipation of future updates can affect earlier disclosure choices, we find that the properties of initial forecasts and earlier updates vary systematically with future updates. Most of regular updaters’ initial forecasts are pessimistic and revised upward subsequently. In contrast, non-updaters tend to issue optimistic initial forecasts, consistent with prior findings on managers’ long-horizon forecasts. Analysts appear to recognize the differential biases in initial forecasts and react less strongly to initial bad news forecasts from regular updaters than from other firms. Moreover, regular updaters are more (less) timely in disclosing bad (good) news to the market than other firms, consistent with regular updates facilitating timely release of bad news. Our findings suggest that updates are important in management forecast research.