The Impact of Forecast Roundness, Forecast Uncertainty, and Managers’ Language on Investors’ Judgments

• In Event: 3.02 Investor Judgment II

Abstract

Management forecasts can have varying degrees of roundness, including sharp (e.g., a sales growth forecast of 9.73% or 10.27%), explicitly round (e.g., 10.00%), and rounded (e.g., 10%). Prior archival research indicates investors rely less upon round than sharp forecasts, yet it is unclear why this occurs or how contextual features of earnings forecasts moderate this effect. Moreover, prior research has not distinguished between the effects of explicitly round versus rounded forecasts. We provide evidence that the impact of forecast roundness on willingness to invest depends upon forecast uncertainty. That is, rounded (versus sharp) sales forecasts enhance management credibility and make investors more willing to invest when forecast uncertainty is higher. Furthermore, we find that investors react to explicitly round forecasts differently from both sharp and rounded forecasts. We also examine and find that under certain circumstances managers can alter their language to repair relatively lower investment willingness caused by credibility concerns. Overall, our results show how a change as seemingly innocuous as rounding a sales forecast can alter investors’ perceptions of management credibility and their willingness to invest. To the extent that investors are less willing to invest due to credibility concerns, our results provide information to financial managers about how to carefully construct earnings forecasts to limit these negative reactions.

Authors

• Jessica Lynn Buchanan, Kent State University - Kent

• David Piercey, University of Massachusetts-Amherst