The Issuance and Informativeness of Management Long-Term Earnings Growth Forecasts

Abstract

SYNOPSISThis study examines quantitative long-term earnings growth (LTG) forecasts issued by publicly traded firms. While the difficulty of verifying management LTG forecasts provides incentives for self-serving disclosures, we find that stakeholder interests and forecast credibility considerations significantly constrain such tendencies. In particular, we find that demand from market participants, information asymmetry, peer LTG forecast provision, product market competition, and industry profitability drive management LTG forecast issuance, while poor performance and high uncertainty over firm growth prospects deter management LTG forecast issuance. Moreover, we provide evidence that management LTG forecasts, on average, provide incremental information about future earnings growth, and that high competition and investor monitoring increase LTG forecast informativeness, consistent with predictions of theoretical cheap talk models. Our findings also indicate that both upward and downward LTG guidance provide incremental information about future earnings growth, and that analysts revise their LTG forecasts in the direction of LTG guidance. Overall, our study contributes to the voluntary disclosure literature by providing evidence that suggests elements of a firm's disclosure environment significantly influence the issuance and informativeness of difficult-to-verify disclosures.JEL Classifications: C23; D81; D82; M41.