Economic Downturns and the Informativeness of Management Earnings Forecasts

We examine how economic downturns affect the value that market participants place on management earnings forecasts. We find that in downturns, news conveyed in management forecasts elicits larger stock price reactions and analyst forecast revisions, suggesting that analysts and investors place greater value on management forecasts during these times. Further, while investors value analyst forecasts more during downturns, they place even more value on management forecasts, which is consistent with investors perceiving managers as having a greater information advantage. We also document that management forecasts become even more accurate relative to analyst forecasts in downturns, implying that the higher value investors and analysts place on management forecasts during these times is justified. Overall, our results are consistent with the hypothesis that because downturns occur relatively infrequently and have unequal effects on firms, market participants increasingly struggle to forecast earnings during these times and find information provided by managers more valuable.