The Impact of Management Earnings Forecasts on Firm Risk and Firm Value

This study investigates whether voluntary management disclosure of earnings forecasts influences investors ’ long-term assessment of firm risk and firm value. We attempt to control for possible endogeneity between various firm-specific characteristics and the voluntary issuing of different types of management earnings forecasts by utilizing a two-stage Heckman treatment analysis. We find a clear negative relationship between the issuance of management earnings forecasts and a variety of risk measures including idiosyncratic risk, stock return volatility, beta, and bid-ask spreads. We fail to find the expected positive relationship between management earnings forecasts per se and firm value as captured by Tobin’s Q. However, the expected positive relationship is clearly established when the issuance of earnings is (i) precise, (ii) frequent, and (iii) credible, as captured by our overall “reputation” variable