Looking Forward: Management Earnings Forecasts and the Value Effect

We examine the pricing implications of management earnings forecasts by taking advantage of the unique corporate disclosure practice in Japan, where listed firms regularly announce earnings forecasts upon requests by stock exchanges and the press. A calendar-time strategy using the forecasted earnings-to-price ratio earns a premium comparable to, and separate from, the value premium based on the book-to-market ratio. The premium is robust to a variety of factor and characteristic controls including realized and forecasted earnings momentum. The result is more consistent with characteristic pricing than factor pricing and challenges risk-based explanation.