Once Is Not Enough: An Analysis of Management Updates of Annual Earnings Forecasts

Abstract

We document a relatively new common phenomenon: managers update their forecasts of annual earnings, often in all interim quarters (i.e., regular updates). More consistent with regular updates being predetermined than being spontaneously issued, we find unique patterns of regular updates diverging from conventional knowledge about annual forecasts. First, regular updaters’ initial forecasts are mostly pessimistic relative to reported earnings, while nonupdated forecasts with similar horizons are mostly optimistic. Second, revisions, if updated only once, are more often downward than upward, while the opposite is true for regular updates. Third, earlier updates in a series of regular updates are more likely to reiterate prior forecasts (i.e., with the same width or midpoint) than later updates and sporadic updates. Forecast updates appear to be informative to analyst revisions. Following the initiation of regular updates, firms enjoy a greater improvement in their information environment compared to nonregular updating firms. Together, our findings suggest that regular updating has important implications to researchers and investors.