Why Do Firms Forecast Earnings for Different Periods Simultaneously?

• In Event: Doctoral Student-Faculty Interchange: Financial Reporting II

Abstract

Despite more data availability, investors still misprice firms’ values due to imprecise, insufficient, or excessive information among other difficulties. By issuing earnings forecasts for multiple periods (both current and future years) simultaneously, managers provide the multiperiod data required for many valuation models and help investors sort out transitory and permanent shocks. We find that firms that are overpriced, are experiencing decreases in analyst coverages due to brokerage closures and mergers, have more transitory earnings, and are facing litigation are more likely to issue multiperiod forecasts simultaneously. Overpriced firms tend to issue both short- and long-term bad news forecasts. Mispricing tends to be corrected in the periods following firms’ multiperiod forecasts, especially when overpriced firms issue current and future bad news forecasts. We also find a more linear current period earnings–return relation when firms issue multiperiod forecasts, which suggests that investors are less likely to underreact to extreme news due to earnings persistence information embedded in these forecasts.

Authors

• Caroline Lee, Temple University

• Sudipta Basu, Temple University