Earnings Forecasts: The Uses Of Pseudo-Precision

Earnings Forecasts: The Uses Of Pseudo-Precision
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Impressed by the precision of a company’s earnings forecast? New study urges caution

Perhaps in support of the remark attributed to Yogi Berra that “it’s tough to make predictions especially about the future,” 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. Citing a prior research estimate that company leaders meet their earnings forecasts only about six percent of the time, a new study begins by asking, “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?”

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