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

Thu Phuong Truong
Victoria University of Wellington
New Zealand

Keitha Dunstan
Victoria University of Wellington
New Zealand

Gerry Gallery
QUT
Australia

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 an earnings forecast portfolio approach in the post 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 expectations of earnings or prior earnings forecast errors. These findings indicate that firms expecting better earnings performance are more conservative in their earnings forecasting compared to those expecting worse earnings performance. Even though this asymmetrical treatment between good news and bad news might not meet the objective of corporate regulators in promoting a continuously updated market, the fact that good news firms indeed increase their earnings forecast practices in the post sanction period does indicate an improvement in the information flow to the capital market.