Career Concerns and Management Forecast Precision

Abstract

This paper examines the effect of managers’ career concerns on the precision of management earnings forecasts. We find evidence that market responses are significantly negative when earnings realizations are outside the range of managers’ earnings forecasts, especially when the realized earnings fall outside the lower bound of the forecast range. To the extent that stock price reactions reflect market assessments of managers’ ability, this evidence suggests that providing narrow-range (i.e., high-precision) forecasts can increase career-related costs. We thus hypothesize that CEOs who are more concerned about market assessments of their ability and hence about their career prospects have greater incentives to widen forecast ranges to avoid negative market assessments. Consistent with this hypothesis, we find that short-tenured CEOs and non-founders provide earnings forecasts less precisely than long-tenured CEOs and founders do.