Executives' Forecasts of Earnings per Share versus Forecasts of Naive Models

Green and Segall evaluated the predictive power of first-quarter earnings reports in two papers,' both of which generated criticisms and comments.2 Near the end of each paper, they presented data which implied that forecasts made by managers do not appear to be than forecasts produced by naive models. Specifically, they concluded in the first paper that almost any reading we do not find the executives' forecasts impressive. . . . If the executives' forecasts haVe any validity and are not biased, we may say that the naive forecasts are not inferior to actual, presumably less naive, forecasts.3 Their replication states, We are still not impressed with the executives' forecasts.4 This particular conclusion encouraged two reviewers to question the validity of their whole study,5 for it seems intuitive, in a normative sense, that managers having more inside information and making forecasts later in the year than the forecasts of naive models should produce better forecasts. Green and Segall's conclusion on the model versus actual comparison has been questioned on the following grounds: (1) their sample of actual forecasts was too small,6 (2) the sample was nonrepresentative,7 and (3) the year(s) selected were nonrepresentative.8 This investigation replicates the model versus actual comparison part of the Green and Segall studies using newer data and a different sampling plan. Our conclusions are in conflict with those of Green and