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Precise Earnings Forecasts May Be Smokescreens

Precise Earnings Forecasts May Be Smokescreens
CFO
By David McCann
Published: May 24, 2017

Research has consistently shown precise-sounding forecasts to have strong impacts, both in bolstering the self-image of those who make them and in impressing those to whom they are made.

Still, precision would seem hazardous for corporate executives when forecasts are as keenly scrutinized as those they make about their firms’ future earnings. A new study begins by asking a pointed question: “Why would top managers issue very precise judgment, particularly in the crucial domain of earnings forecasts or guidance of next year’s earnings, given that such precise judgment potentially induces errors and erodes their credibility?

The conclusion of the paper, published in the June issue of the Academy of Management Journal, is not encouraging to investors. Management forecasts that are relatively precise, the research found, generally do not derive from any special insight by the leaders who issue them. More likely, they represent an effort at managing impressions in the wake of company failures or stumbles.

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