The Information Content of Managers' Forward-Looking Disclosures

Abstract

I use textual analysis to measure the amount of forward-looking disclosures in public firms' 10-K reports, and relate it to the forecast revisions of sell-side analysts around the publication dates of these reports. By focusing on the revisions of forecasts made after the publication of a firm's financial results for the fiscal year covered by its report, I ensure that my findings are not driven by the simultaneous disclosure of forward-looking and financial information. Using a sample of 13484 firm-year observations, I find that more analysts revise their 1-year earnings per share (EPS) forecasts in response to a 10-K filing if the corresponding report contains more forward-looking expressions. Furthermore, among those analysts who responded to a report publication, the error of their revised forecasts is smaller for firms whose reports contain more forward-looking statements. These findings suggest that analysts perceive managers' forward-looking disclosures to be informative, and that their perception is justified. Further analyses reveal that the perceived and actual informativeness of such disclosures is more pronounced among firms which are opaque or experienced a strong recent profitability growth. I also find evidence that managers' forward-looking disclosures affect analysts' longer-term EPS forecasts in a similar way as their short-term forecasts.