Using Sales Forecasts to Reveal Management’s Private Information about Product Quality
We examine whether management sales forecasts serve as a tool for managers to
signal the quality of their products when their firms experience diminished perception
from investors about the quality of their products. We identify close peers’ product
recalls as a setting in which non-recalling firms may have a heightened incentive to
differentiate themselves from their low-quality peers by issuing favorable sales
forecasts. Our analyses show that following their close peers’ product recall
announcements, firms significantly increase the issuance of favorable management
sales forecasts. The increase in favorable management sales forecasts is more
pronounced when the non-recalling close peers have greater analyst coverage and
faces more intensive product market competition, and when the product recalls are
more severe. Furthermore, we find that the issuance of favorable management sales
forecasts mitigates the negative effect of close peers’ product recalls on firms’
cumulative abnormal returns and helps them gain more market share from these peers.
Overall, the results suggest that managers use sales forecasts strategically to achieve
their disclosure purposes.