Measuring News in Management Range Forecasts

Management earnings forecasts expressed as a range have become the most common form of quantitative management guidance. Traditionally, the proxy for the sign and the magnitude of the information conveyed by these forecasts – the forecast news – is calculated as the difference between a pre-forecast earnings expectation and the midpoint of the forecasted range. We provide strong evidence that this traditional measure understates the amount of information conveyed by range forecasts. More importantly, we demonstrate that information conveyed by the upper and lower bounds of the forecasts can be used to improve the classification of forecasts as conveying good or bad news and for calculating the magnitude of that news. We rely on these findings to suggest alternative methods of classifying management range forecasts as conveying good versus bad news and to refine the calculation of forecast news to include the broader information set. Our analysis also suggests that the information conveyed by the range when the forecasts are bundled (issued concurrent with an earnings announcement) is significantly different than when forecasts are not bundled. Overall, our study documents the importance of incorporating range-related information when assessing the sign and the magnitude of the information conveyed by management range forecasts