Prof Luca Del VivaS

This study examines the effect of management earnings forecast imprecision (IMP) on future equity returns. We report that a wider management forecast range (high IMP) is associated with lower subsequent stock returns. This evidence is consistent with the notion that a wider management forecast range reflects increased uncertainty and Miller’s (1977) conjecture that increased divergence of opinion allows optimist investors to dominate leading to lower subsequent returns. In a market that exhibits dispersion of investor opinions regarding earnings estimates, high IMP discourages pessimistic investors who face short-selling constraints while optimists who believe in the high end of the range take long positions, leading to stock overpricing and subsequently to lower returns. Further, we find that high IMP also reflects genuine uncertainty regarding future earnings which may appeal to growth and lottery-type investors. The negative impact of IMP on subsequent returns is incremental to analyst forecast uncertainty, dispersion, and a host of previously documented predictors of future returns.

Date: 31 March 2021

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