Cost Uncertainty and Management Sales Forecasts
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This study examines the effect of cost uncertainty on management sales forecasts. My analysis reveals that firms with more uncertain (i.e., less predictable) cost patterns are more likely to and more frequently issue management sales forecasts. Moreover, issued management sales forecasts are more accurate and informative when firms have less predictable cost patterns. These results suggest that firms endeavor to meet strong demand for sales forecasts from information users when their cost patterns are uncertain. Meanwhile, I find that firms are less likely to and less frequently issue management earnings forecasts when their costs are less predictable. These findings suggest that besides their supplementary or confirmatory role for contemporaneously issued management earnings forecasts, management sales forecasts substitute management earnings forecasts when costs are hard to predict. Using several sensitivity analyses, such as an instrumental variables approach, a difference-in-difference test using an industry-wide shock to cost uncertainty, and a simultaneous equation model, I show that my findings are robust to endogeneity concerns. Overall, the findings in this study suggest that management sales forecasts are used as a more important voluntary disclosure mechanism when a firm’s cost patterns are less predictable.