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The Superficial Precision of Point Forecasts
Working paper   Open access

The Superficial Precision of Point Forecasts

Hamilton Scott Asay, Paul Hribar and Claire Quinto
SSRN
10/07/2023
DOI: 10.2139/ssrn.4598253
url
https://doi.org/10.2139/ssrn.4598253View
Open Access

Abstract

A large body of literature on management forecasting assumes point forecasts are the most precise forecast issued by managers. Using archival and survey data, we challenge this assumption. First, examining forecast data, we find a U-shaped relation between analyst forecast dispersion and the frequency of point forecasts. This suggests that point forecasts are frequently used in periods of high uncertainty. Second, after giving a sample of sophisticated investors a hypothetical earnings announcement with accompanying range and point forecasts, survey respondents overwhelmingly view range forecasts as more informative and more credible than point forecasts. Third, when examining the market reaction to management forecasts, we find that the market responds less strongly to point forecasts than to range forecasts. Overall, our results suggest that point forecasts are often used in periods of high uncertainty and that investors regard point forecasts as providing less precise information than range forecasts on average.
 Management forecasts management forecast precision management forecast credibility voluntary disclosure

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