Does the midpoint of range earnings forecasts represent managers’ expectations?

How do analysts interpret management range forecasts?

“…1 A recent study by Ciconte et al (2014) challenges this convention and examines whether the midpoint represents managers' true expectation -a question that is related to but different from ours. Finding the distribution of actual reported earnings to be more concentrated around the upper bound of management range forecasts, they conclude that the upper bound is more representative of managers' expectations than the midpoint.…”

“…Earlier studies find mixed evidence on the effect of forecast form on market reaction (Baginski et al, 1993;Pownall et al, 1993). Notably, range forecasts have emerged as the predominant form of management forecasts from 6.8% in the 1980s (Pownall et al, 1993) to over 80% in recent years (Choi, Myers, Zang, & Ziebart, 2011;Ciconte et al, 2014). Despite its popularity, little research exists on how analysts interpret range forecasts.…”

“…Following this convention, most accounting studies use the midpoint to measure management forecast news in evaluating analysts' revisions in response to management forecasts (e.g., Feng & McVay, 2010;Gong et al, 2011). Ciconte et al (2014) challenge this convention and seek to explore which point of the forecast range best represents managers' true expectations. Relative to the midpoint, they find the upper bound is more representative of managers' ex ante true beliefs, proxied by the ex post reported earnings.…”

“…However, measuring forecast news can be difficult for range forecasts where managers provide both an upper bound and a lower bound of their earnings expectations. This issue becomes more important because range forecasts recently emerge as the most popular type of forecasts, accounting for around 80% of all management forecasts issued in the last decade (Ciconte, Kirk, & Tucker, 2014), a sharp increase from under 20% in samples used in earlier studies (e.g., Pownall et al, 1993). This paper examines how analysts interpret management range forecasts.…”

“…We caution readers to distinguish the ''weight'' from the ''distance'', which is examined by Ciconte et al (2014). After showing that the actual earnings are more likely to be around the upper bound rather than the midpoint of managers' range forecasts, they investigate and find that analysts' revised forecasts are, on average, slightly above the midpoint but well below the upper bound, suggesting that analysts barely unravel the pessimistic bias in managers' range forecasts.…”