How Do Firms Manage Their Earnings Forecast Strategy? A New Zealand Study

Abstract

In contrast to the trend of research investigating why firms decide to release earnings forecasts to pre-empt any expected change in earnings, our study investigates how firms manage their earnings forecast strategy once they have decided to release earnings forecasts. Using a sample of 350 NZX-listed firm years with balance date ending from 31 January 1999 to 31 December 2005 for 94 companies across the statutory-backed continuous disclosure regime, we document that firms are more likely to adopt a multiple earnings forecast (a portfolio) approach in the statutory sanctions period, particularly for the group of firms expecting favourable earnings change. We also document that these good news firms have a higher propensity to gradually update the market with good news earnings forecasts while those with bad news are more likely to immediately correct current market earnings expectations. These findings indicate that firms expecting better earnings performance are more conservative in their earnings forecasting compared to those expecting worse earnings performance. Although this asymmetrical treatment of good and bad news might not meet the corporate regulators’ objective of a continuously updated market with an unbiased approach to the treatment of information, the overall increase in disclosure frequency in the statutory sanctions period does indicate an improvement in the information flow to the capital market.