Uncertainty of Firm Operating Environment and the Usefulness of Management Forward-Looking Information

We find that the precision of management guidance decreases when the predictability of future earnings decreases. More importantly, like the information provided by analysts to investors, management forward looking information (management guidance) increases in usefulness at times of low predictability of future earnings, when the source of uncertainty of future earnings is firm-specific. However, when the source of uncertainty is related to the overall economy, unlike analysts’ information, management forward-looking information does not increase in usefulness to investors. Finally, it is important to distinguish between the four different forecast horizons embedded in firms’ annual guidance