Do management EPS forecasts allow returns to reflect future earnings? Implications for the continuation of management's quarterly earnings guidance

Jong Hag Choi, Linda A. Myers, Yoonseok Zang, David A. Ziebart

Research output: Contribution to journalArticlepeer-review

53 Scopus citations

Abstract

Using 18,253 firm-year observations from 1998 through 2003, we build on literature suggesting that more informative disclosures allow returns to better reflect future earnings and test whether management earnings per share forecasts and their characteristics influence the future earnings response coefficient (FERC). We find that FERCs are greater for forecasting firms and when forecasts are more frequent or precise. We suggest that more frequent and more precise forecasts assist investors in better predicting future earnings. Importantly, we find that quarterly and short-term forecasts incrementally increase the association between returns and future earnings beyond annual and long-term forecasts; thus, even short-term, quarterly forecasts allow investors to form better expectations about future earnings. This suggests a benefit of quarterly earnings forecasts possibly overlooked in recommendations from the United States Chamber of Commerce, CFA Institute, Business Roundtable Institute for Corporate Ethics, and The Conference Board to eliminate quarterly earnings guidance.

Original languageEnglish
Pages (from-to)143-182
Number of pages40
JournalReview of Accounting Studies
Volume16
Issue number1
DOIs
StatePublished - Mar 2011

Bibliographical note

Funding Information:
Acknowledgments We thank Brian Bratten, Sun-Hwa Choi, Kooyul Jung, Byungjin Kwak, Young K. Kwon, Benjamin Lansford, Stephannie Larocque, Jay Junghun Lee, James Myers, Tom Omer, Stephen Penman (editor), Charlie Sohn, Catherine Sonu, an anonymous referee, and workshop participants at the Korea Advanced Institute of Science and Technology, Seoul National University, and the University of Kansas, as well as conference participants at American Accounting Association 2008 Annual Meeting and the Korean Accounting Association 2008 Annual Meeting for helpful discussions and comments. Jong-Hag Choi gratefully acknowledges financial support from the Samil PricewaterhouseCoopers Faculty Fellowship. Linda Myers gratefully acknowledges financial support from the Pricewaterhous-eCoopers Faculty Fellowship while at Texas A&M University and from the Garrison/Wilson Chair at the University of Arkansas.

Keywords

  • Earnings guidance
  • Forecast characteristics
  • Future earnings response coefficient (FERC)
  • Management forecasts

ASJC Scopus subject areas

  • Accounting
  • General Business, Management and Accounting

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