Knowledge that Transforms
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On the optimal use of loose monitoring in agencies
A discussion of “Do managers use earnings guidance to influence street earnings exclusions?”
Bank debt covenants and firms’ responses to FAS 150 liability recognition: evidence from trust preferred stock
The option market’s anticipation of information content in earnings announcements
Using earnings forecasts to simultaneously estimate firm-specific cost of equity and long-term growth
Analysts’ accrual-related over-optimism: do analyst characteristics play a role?
The voluntary adoption of International Financial Reporting Standards and loan contracting around the world
The impact of audit penalty distributions on the detection and frequency of fraudulent reporting
Do management EPS forecasts allow returns to reflect future earnings? Implications for the continuation of management’s quarterly earnings guidance
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.