Prior Forecasting Accuracy and Investor Reaction to Management Earnings Forecasts

By Amy P. Hutton, Phillip C. Stocken. Journal of Financial Reporting, 2009

155 citations recorded by the source corpus.

We examine the properties of firms' forecasting records and whether the accuracy of their prior earnings forecasts affects investor response to their subsequent forecasts.Within the context of a Bayesian model of investor learning, we find that the stock price response to management forecast news is increasing in prior forecast accuracy and also in the length of a firm's forecasting record. Further, we document that investors are more responsive to extreme good and bad news forecasts when a firm has an established forecasting record. Overall, these results suggest that a firm's prior forecasting behavior allows it to establish a forecasting reputation, and that market forces encourage accurate forecasting as firms benefit from having a reputation for forecasting accurately. Data Availability: Data are available from public sources cited in the text. JEL Classifications: G19; G39; D89; M40.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/cf9a649dee6db688f6f7cf3143acc920003e7149

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Citations in the corpus

• Internal Control and Management Guidance (2009, background): “…forecast accuracy over the preceding 3 years, where the accuracy is equal to 1, 0, and 1, respectively, if the absolute value of the pre-existing analyst forecast error is greater than, equal to, or less than the absolute value of the management forecast error, following Hutton and Stocken (2009).”
• Soft information in earnings announcements: news or noise? (2008, methodology): “As in Hutton and Stocken (2009), the total number of forecasts that a firm has issued is determined by counting the firm’s annual and quarterly earnings forecasts captured by First Call’s CIG database since January 1994.”
• Do Managers Always Know Better? The Relative Accuracy of Management and Analyst Forecasts (2012, unknown): “pronounced in situations where analysts find it hard to anticipate managers’ response to unusual Ruland (1978) and Hutton and Stocken (2009) document that management’s forecasts are more accurate than analysts’ forecasts only about 50% of the time.”
• The impacts of product market competition on the quantity and quality of voluntary disclosures (2010, methodology): “In particular, I use previous year’s forecasting accuracy (t− 1) as the ex ante measure for disclosure quality and the results are qualitatively unchanged (Hutton and Stocken (2009)).”
• Management Forecast Quality and Capital Investment Decisions (2014, unknown): “16 Hutton and Stocken (2009) use a relative accuracy measure computed as the manager’s forecast accuracy less the consensus analyst forecast accuracy.”
• Capital Market Consequences of Managers’ Voluntary Disclosure Styles (2012, methodology): “This result is consistent with Williams (1996) and Hutton and Stocken (2009), who find that security analysts and investors are more responsive to forecast news when firms develop a reputation for issuing more accurate forecasts in the past.”
• Executive Extraversion: Career and Firm Outcomes (2018, background): “The Accounting Review Volume 94, Number 3, 2019 in Hutton and Stocken 2009).”
• The debt market relevance of management earnings forecasts: evidence from before and during the credit crisis (2011, unknown): “In addition, Kasznik and Lev (1995) and Hutton and Stocken (2007), among others, report that firms with bad news are more likely to issue management forecasts than firms with good news.”
• Endogenous Overconfidence in Managerial Forecasts (2011, background): “16 This estimate is consistent with the literature (e.g., Hutton and Stocken, 2009).”
• CEO Overconfidence and Management Forecasting (2016, unknown): “…rate, and these forecasts are either too optimistic or too narrowly specified, this will increase the chance of missing the forecast, which has significant consequences for their reputation, credibility and career prospects (Hutton and Stocken 2009; Mergenthaler, Rajgopal, and Srinivasan 2011).”