Range Has it: Decoding the Information Content of Forecast Ranges

Abstract

Given that most management forecasts in recent years are issued in range form and that most firms are followed by multiple analysts issuing dispersed forecasts, the conventional measure of management forecast news based on the midpoint of management forecast and the consensus analyst forecast does not fully capture the information content conveyed by range forecasts. This paper seeks to partially uncover such information by investigating an unexamined dimension unique to range forecasts –– overlapping between management forecast ranges and the ranges formed by individual analyst forecasts, which occurs in nearly 84% of range forecasts. Controlling for the width of management forecasts and analyst forecast dispersion, we find that compared with “overlap” management forecasts, “non-overlap” forecasts have greater impact on analyst revisions and stock market reaction to per unit forecast news. The non-overlap forecasts also turn out to have high relative forecast accuracy over analyst consensus forecasts. Moreover, individual analysts whose prior forecasts are outside of management forecast ranges respond more strongly to “non-overlap” forecasts than to “overlap” forecasts, and this difference is significant only when management forecasts convey bad news. Overall, our findings suggest that range forecasts convey more information beyond just the midpoint and analysts’ consensus.