Corporate Forecasts of Earnings Per Share and Stock Price Behavior: Empirical Test

The disclosure of corporate forecasts of projected annual earnings was a topic of intensive debate within the investment community during the years 1970-75. Questions of accuracy, objectivity, independent certification, and investment utility were examined from a number of theoretic and pragmatic viewpoints.' Most of these inquiries appear to assume that an investor's beliefs and/or actions may be affected by the disclosure of a management forecast, and several explore the possible rewards and sanctions that a firm may experience as a result of forecast accuracy. The purpose of this study is to test the hypothesized information content of management forecasts through the examination of the common stock price behavior which accompanied the voluntary disclosure of 336 forecasts of annual earnings per share during the years 1963-67. The results reported here indicate that these forecast disclosures were accompanied by significant price adjustments, from which the inference may be drawn that either the data presented in a management forecast, the act of voluntary disclosure, or both, convey information to investors.