The informativeness of earnings and management's issuance of earnings forecasts

Theory suggests that managers forecast earnings to reduce information asymmetry. A management forecast is more effective in reducing information asymmetry if the forecast contains earnings news that is more informative of the firm's value. Therefore, we hypothesize that a manager is more likely to forecast earnings if investors perceive that earnings are more informative. We measure earnings informativeness by estimating the firm's earnings response coefficient (ERC) in quarters prior to the forecast issuance decision. Consistent with our hypothesis, we find that the firm's historic ERC is positively associated with management's issuance of earnings forecasts.