An Empirical Study of Management Guidance Behavior's Effect on Analyst Forecast and Dispersion

Abstract

Using 84.781 management guidance forecasts from companies across the LargeCap500, MidCap400, and SmallCap600, we examined companies' guidance behavior. We found that over the years, guidance behavior has become more active, i.e., more firms have started to provide management guidance, and those firms that provide guidance often guide on more items than before. At the same time, we found that where points were the most dominant guidance method in previous literature, a picture emerges that there has been a significant shift and that range forecasting is now the most widely used guidance method among firms. EPS is no longer the most widely used guidance item among firms, which emphasizes the need to investigate the effect of the guidance method on forecast accuracy on other guidance items than just EPS. We found that there is a significant difference in guidance behavior between sectors, measured by the number of items firms guide on. Firms in high uncertainty sectors guide on significantly more items than firms in low uncertainty sectors. Using analysts as a proxy for how management guidance is perceived, we did not find that the guidance method has a significant effect on analysts' subsequent forecast error on EPS as the literature suggests. We found that using range instead of point forecast leads to lower forecast error on Revenue and EBITDA at a 1% significance level. We found that, when the width increases on the range forecast, this leads to higher forecast errors on Revenue, EBITDA, and EPS. The management guidance method reduces analysts' forecast dispersion at a 1% significance level. The results are consistent across the three items examined: Revenue, EBITDA, and EPS. Subsequently, we found that for those who issued management guidance on Revenue and EPS as a range, the wider the range forecast, the higher the analysts' subsequent dispersion. The results are significant at the 1% level for Revenue and EPS. However, we cannot find the effect on the guidance item EBITDA