THE STOCK-PRICE EFFECTS OF ALTERNATIVE TYPES OF MANAGEMENT EARNINGS FORECASTS

This paper examines the stock price effects of alternative types of ma nagement earnings forecasts. Beyond deciding whether to disclose forec asts, managers must decide whether to issue a point projection or a mo re qualitative estimate (e.g., a bounded range), and whether to projec t interim or annual earnings or both. Our empirical tests assess diffe rences in the information content of management earnings forecasts tha t differ by form and horizon. Our tests provide a comprehensive invest igation of the price effects of these alternative forecast disclosure types. While an extensive literature exists on the relation between ma nagement forecasts and stock prices, most previous studies examine onl y point and range forecasts of annual earnings (e.g., Penman 1980; Aji nkya and Gift 1984, Waymire 1984; McNichols 1989; Pownall and Waymire 1989). Exceptions include Lev and Penman (1990), Patell (1976), and Ba ginski et al. (1993). Lev and Penman (1990) include lower and upper bo und forecasts for part of their sample period, but do not examine thes e disclosure forms separately. Patell (1976) provides evidence on mean price changes associated with a sample of annual minimum and maximum forecasts. Baginski et al. (1993) examine alternative forecast forms. Prior analyses of managers' disclosure incentives speculate that inves tors may condition their assessment of forecast information on disclos ure form and horizon. For instance, King et al. (1990) suggest that fo recast disclosures emerge as voluntary managerial actions to reduce co stly information asymmetry in capital markets. Under the ''expectation s adjustment'' hypothesis, managers have incentives to acquire and mai ntain a reputation for credible disclosure. Rational investors recogni ze that disclosure quality varies systematically by disclosure form an d will discount qualitative projections or those issued with longer ho rizons. Policy debates on mandatory disclosure of qualitative informat ion, such as the recent SEC debates over the content of ''Management D iscussion and Analysis'' disclosures, and deliberations on forecast di sclosure in the 1970s (see King et al. 1990), also suggest a need for evidence on the information content of qualitative prospective disclos ures and alternative forms of forecasts.1 Our primary tests are based on a sample of 1,252 forecasts disclosed by 91 firms between July 1, 1 979 and December 31, 1987. Several conclusions emerge from these tests . First, forecast disclosures remain highly informative even when incl uding other disclosure types not analyzed in prior studies. Second, fo recasts are less informative than earnings announcements for our full sample, a finding that is inconsistent with earlier results in Pownall and Waymire (1989). Third, differences across forecast forms are not significant at conventional levels. Fourth, interim forecasts are sign ificantly more informative than annual projections. This result is dri ven largely by maximum forecasts, which are highly informative and mor e frequent in the interim forecast subsample. We document several addi tional regularities that may be of interest to researchers. First, poi nt and range annual forecasts comprise less than 20 percent of our sam ple. This suggests that the incidence of voluntary management forecast disclosure is possibly far greater than suggested by previous studies . Second, range forecasts tend to be quite inaccurate ex post. Actual earnings per share (EPS) fell outside the forecasted bounds in more th an 50 percent of our range forecasts. Third, forecasts that are more q ualitative tend to be issued over longer horizons. Minimum forecasts a re issued over the longest horizons for our sample, and interim point projections have the shortest horizons. Finally, extensions to our pri mary tests provide some evidence that maximum forecasts have significa nt negative price effects, and that for point forecasts, forecast revi sions are highly informative.