The Superficial Precision of Point Forecasts

<p><span>Prior literature widely assumes point forecasts are the most precise form of management forecasts. We challenge this assumption by examining when and why managers issue point forecasts and how investors interpret them. Using archival data, executive interviews, and investor surveys, we document a nuanced association between uncertainty and forecast form. Archival data show a U-shaped relationship between analyst forecast dispersion and the proportion of point forecasts issued, indicating frequent use during both low- and high-uncertainty periods. Interviews suggest managers use point forecasts strategically amid high uncertainty to avoid explicitly signaling uncertainty, set conservative benchmarks, signal confidence, and manage market expectations. Further archival analysis reveals that investors and analysts respond less strongly to point forecasts than to range forecasts on average, indicating market participants view point forecasts as superficially precise but less informative and credible. Surveys of professional investors confirm these findings, revealing a clear preference for range forecasts due to their greater informativeness and credibility. Overall, we document that point forecasts typically represent imprecise managerial earnings expectations, and market participants interpret and respond to them accordingly.</span></p>