Security Price Reactions to Long-Range Executive Earnings Forecasts

In addition to the recent interest of the Securities and Exchange Commission, executive forecasts of earnings have received a considerable amount of attention in the academic literature (Basi, Carey, and Twark 1976, Lorek, McDonald, and Patz 1976, McDonald 1973, Copeland and Marioni 1972, Kapnick 1972, Daily 1971). Much of this attention has focused either on the absolute or relative accuracy of such forecasts or on the ethical, legal, and practical problems of publishing and reviewing executive forecasts of earnings in external accounting reports. One aspect that has not been adequately considered is investor reaction to executive long-range forecasts of earnings. The purpose of this study is to investigate the information content of voluntarily disclosed long-range earnings forecasts by executives by determining security return reactions to a sample of such forecasts that were reported in the Wall Street Journal. The inclusion of management estimates of future earnings in annual reports is advocated on the assumption that such forecasts contain information, of interest to investors or other persons outside the firm, not otherwise publicly available. Not only do executives have information about internal and external factors expected to affect future operations and earnings, but they also exert considerable effort evaluating these factors and their impact on prospective operations in the normal planning function. Consequently, executive forecasts of earnings might be of inter-