How Do Investors Benefit From Firms’ Simultaneous Issuance of Multiyear Earnings Forecasts?

By issuing earnings forecasts for both current and future years simultaneously, managers provide the multiyear data needed for more accurate valuations and help investors sort out transitory and permanent shocks. We examine whether and how firms’ issuance of multiyear earnings forecasts mitigates equity mispricing. We find that growing, better‐ performing, and high litigation‐risk firms, and firms that missed their guidance issue more multiyear forecasts, whereas firms facing greater forecasting difficulty issue fewer. After firms issue multiyear forecasts, mispricing tends to be corrected, especially when underpriced firms issue both long‐ and short‐term good news forecasts and when overpriced firms issue long‐term bad news forecasts. The delayed response to earnings (i.e., PEAD) decreases when firms issue multiyear forecasts. Analysts’ 12‐month‐ahead price forecasts become more accurate when multiyear earnings forecasts are issued, suggesting that more accurate analyst valuation is one channel through which equity mispricing is corrected. Lastly, we find that the current‐period earnings–return relation becomes more linear when firms issue multiyear earnings forecasts, which suggests that investors underreact less to extreme news because the future years’ forecasts embed earnings persistence data. However, the greater linearity may reflect the higher earnings persistence of firms self‐selecting to issue multiyear earnings forecasts.