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The appeal of vague financial forecasts

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  • Du, Ning
  • Budescu, David V.
  • Shelly, Marjorie K.
  • Omer, Thomas C.
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    Abstract

    Prior findings suggest managers often choose ranges to communicate uncertainty in future earnings. We analyzed earnings forecasts over 11 years and find higher earnings uncertainty firms are more likely to choose range estimates. We study investors' attitudes to forecast precision and argue investors' evaluations of forecasts can be explained by a sequential non-compensatory two-stage process - First, investors determine whether a point or a range estimate is more appropriate for a particular domain based on the congruence principle. Then, they seek the most precise reasonable range to maximize informativeness. Results from three experiments indicate the preference for (im)precision is non-monotonic - it peaks for low levels of imprecision and diminishes when the range gets wider, and is consistent with participants' desire for congruent and informative estimates, and supports the claim that investors favor forecasts that are as precise as warranted by the information available, but not more precise.

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    Bibliographic Info

    Article provided by Elsevier in its journal Organizational Behavior and Human Decision Processes.

    Volume (Year): 114 (2011)
    Issue (Month): 2 (March)
    Pages: 179-189

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    Handle: RePEc:eee:jobhdp:v:114:y:2011:i:2:p:179-189

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    Web page: http://www.elsevier.com/locate/obhdp

    Related research

    Keywords: Communication mode Congruence Imprecision Management forecasts Point Range Uncertainty Vagueness;

    References

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    1. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, 02.
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    8. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
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    10. Granger, Clive W J, 1996. "Can We Improve the Perceived Quality of Economic Forecasts?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 455-73, Sept.-Oct.
    11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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    14. Ning Du & David V. Budescu, 2005. "The Effects of Imprecise Probabilities and Outcomes in Evaluating Investment Options," Management Science, INFORMS, vol. 51(12), pages 1791-1803, December.
    15. Bipin Ajinkya & Sanjeev Bhojraj & Partha Sengupta, 2005. "The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 343-376, 06.
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    Cited by:
    1. Goodwin, Paul & Sinan Gönül, M. & Önkal, Dilek, 2013. "Antecedents and effects of trust in forecasting advice," International Journal of Forecasting, Elsevier, vol. 29(2), pages 354-366.

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