An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Clive Lennox
Hong Kong University of Science & Technology

Chul Park
Sungkyunkwan University

Abstract: Theory suggests that managers forecast earnings to reduce information asymmetry. A management forecast is more effective in reducing information asymmetry if the forecast contains earnings news that is more informative of the firm’s value. Therefore, we hypothesize that a manager is more likely to forecast earnings if investors perceive that earnings are more informative. We measure earnings informativeness by estimating the firm’s earnings response coefficient (ERC) in quarters prior to the forecast issuance decision. Consistent with our hypothesis, we find the firm’s historic ERC is positively associated with management’s issuance of earnings forecasts.

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