Long-Term Information in the Decision to Provide a Short-Term Forecast

Several recent empirical papers assert that the decision to disclose an earnings forecast shortly before the actual earnings announcement reveals only short-term information and is therefore unlikely to entail proprietary costs. Using a simple dynamic model of voluntary disclosure, we show that the decision to disclose a short-term earnings forecast reveals managers’ private information about long-term future performance. We test the predictions of the model empirically and find that the decision to disclose a short-term earnings forecast predicts earnings three years beyond the forecasted period, and that the predictive ability is incremental to short-term earnings itself. Consistent with the predictions of our model, we find that the predictive ability of the short-term forecast decision for long-term performance is higher when short-term performance is poor; is lower when managers have short horizons; and is lower when proprietary costs of revealing long-term performance is high. Our analysis suggests that – despite its short horizon – the decision to provide a short-term earnings forecast contains significant information about long-term performance and thus can entail significant proprietary costs.