The Influence of Corporate Risk Exposures on the Accuracy of Earnings Forecasts

46 Pages Posted: 6 Mar 2003

See all articles by Wayne R. Guay

Wayne R. Guay

University of Pennsylvania - Accounting Department

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Date Written: January 2003

Abstract

We examine how corporations' exposures to interest rates, exchange rates, and commodity prices are related to investors' and analysts' expectations about firms' earnings. The results indicate that investors and analysts encounter difficulties estimating the earnings effects of the risk exposures that companies face. Stock returns around earnings announcements are associated with the magnitude of both recent quarter and lagged shocks to interest rates, exchange rates and commodity prices, especially for firms with large ex-ante exposures to these risks. Further, although intra-quarter revisions to analysts' forecasts do incorporate information about the earnings effects of the risk shocks, analysts' earnings forecasts do not fully resolve the uncertainty created by recent quarter and lagged shocks. Overall, the results suggest that analysts resolve between 28% and 56% of the total uncertainty created by interest rate, exchange rate, and commodity price shocks (the percentage reduction depends on the types and magnitudes of a given firm's exposures). The results are consistent with arguments that corporate financial risk exposures are not transparent to investors or analysts, and support recent research arguing that firms' hedging strategies consider this source of earnings uncertainty.

Keywords: risk exposures, risk management, analysts' forecasts, interest rate risk, exchange rate risk, commodity price risk, risk disclosures

JEL Classification: G12, G29, G32, M41

Suggested Citation

Guay, Wayne R. and Haushalter, David and Minton, Bernadette A., The Influence of Corporate Risk Exposures on the Accuracy of Earnings Forecasts (January 2003). Available at SSRN: https://ssrn.com/abstract=375740 or http://dx.doi.org/10.2139/ssrn.375740

Wayne R. Guay (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration ( email )

University Park, PA 16802
United States
814-863-7969 (Phone)
814-865-3362 (Fax)

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

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