The Consequences of Management Earnings Forecast Regulation PDF Download

Author: Bin Ke
Publisher:
ISBN:
Category :
Languages : en
Pages : 55

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Book Description
We examine the consequences of a management earnings forecast regulation implemented in a staggered manner. The regulation substantially increases the directly affected firms' frequency of management forecasts. Nevertheless, approximately 14% of the directly affected firms fail to comply with the regulation (noncompliant firms). The regulation helps increase the stock price informativeness of the directly affected firms that issue a forecast. The regulation also helps increase the stock price informativeness of the noncompliant firms (a spillover), but we find no evidence of a similar spillover for the firms that are not required to issue mandatory forecasts in the post-regulation period.

Author: Amy P. Hutton
Publisher:
ISBN:
Category :
Languages : en
Pages : 46

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Abstract: Prior to Regulation Fair Disclosure some management spent considerable time and effort guiding analyst earnings estimates; other management did not. In this paper I examine the determinants and consequences of management's decision to work with analysts in the development of their earnings estimates using proprietary survey data from the National Investor Relations Institute. Findings suggest that when earnings are important to valuation but hard to forecast because businesses and financial transactions are complex, management is more likely to provide assistance to analysts presumably to avoid inaccurate analyst forecasts and negative earnings surprises. A comparison of guided and unguided analyst forecasts indicates that guided quarterly earnings forecasts are more accurate but also more frequently pessimistic, consistent with analysts rationally trading offbias for accuracy to retain access to management's earnings guidance. Cross-sample comparisons of analysts' stock recommendations and long-term growth forecasts provide additional support for the hypothesis that analyst objectivity and independence is affected by management's decision to provide earnings guidance. Finally, evidence from stock price reactions to deviations from the consensus forecast (the traditional measure of earnings surprises) indicates that investors distinguish between guided and unguided analyst forecasts when forming their earnings expectations. This study furthers our understanding of what factors affect management's disclosure choices and how managers' disclosure choices influence the objectivity and independence of sell-side analysts.

Author: Keitha L. Dunstan
Publisher:
ISBN:
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Languages : en
Pages : 0

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This study seeks to examine the impact of the continuous disclosure regulatory reform on the likelihood, frequency and qualitative characteristics of management earnings forecasts in New Zealand where a low private litigation environment prevails. This provides a unique opportunity to study the impact of a public regulatory reform in the absence of any viable private enforcement alternative. Using a sample of 720 management earnings forecasts issued by 94 firms listed on the New Zealand Stock Exchange during the financial reporting periods ending from 31 January 1999 to 31 December 2005, we provide strong evidence of significant changes in management earnings forecast behaviour in the post-regulatory reform period. Specifically, firms were more likely to issue an earnings forecast to pre-empt their earnings announcements and forecasting firms provided a greater number of earnings forecasts which were also more precise and accurate. These findings add to the concurrent evidence that the enhancement of public enforcement in New Zealand has had positive impact on corporate behaviour and capital market characteristics in an environment where there is a very low threat of private enforcement. This may indicate that public regulatory reforms are able to have a greater benefit where low private litigation environment prevails. This study provides insight into the impact of a public regulatory reform on corporate disclosure behaviour which may contribute to the debate regarding the value of further public regulatory reform of corporate requirements internationally.

Author: Bikki Jaggi
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ISBN:
Category :
Languages : en
Pages : 0

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This study examines whether a regulation on mandatory disclosure of earnings forecasts encourages managers to issue more optimistic earnings forecasts, and whether the optimistic forecasts are revised downward or the reported earnings are managed upward using discretionary accruals to reduce the forecast error. Additionally, it evaluates how investors react to earnings management and forecast revisions. The study is based on 760 forecasts issued by Taiwan IPO firms from 1991 to 2000 after the regulation to issue the earnings forecasts was imposed by the Taiwan Securities and Futures Exchange Commission (TSFEC) and it also uses a sample of 86 IPO firms prior to the issue of regulation. The results show that the IPO firms issue more optimistic forecasts than conservative forecasts. They adjust their reported earnings of optimistic forecasts upward with discretionary accruals more than revising the earnings forecasts downward, whereas they revise conservative forecasts upward more than adjusting the reported earnings downward. The results on the comparative analysis of earnings management by IPO firms before and after issuance of the TSFEC regulation provide additional support to the findings that earnings management by IPO firms increased significantly after the regulation was imposed. The results on investors' reaction to reported earnings show that investors reacted positively to higher reported earnings compared to the last revision of forecasts and they ignored the upward adjustment of reported earnings. Their reaction has been negative to downward revisions and positive to upward revisions.

Author: Kenneth J. Merkley
Publisher:
ISBN:
Category :
Languages : en
Pages : 48

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We provide archival evidence on how a particular type of supplementary information affects the credibility of management earnings forecasts. Managers often provide detailed forecasts of specific income statement line items to shed light on how they plan to achieve their bottom-line earnings targets. We assess the effect of this forecast disaggregation on the credibility of management earnings forecasts. Based on a relatively large hand-collected sample of 900 management earnings forecasts, we find that disaggregation increases analysts' sensitivity to the news in managers' earnings guidance, suggesting that analysts find the guidance more credible. More importantly, we identify several factors that influence this relation. First, disaggregation plays a more important role when earnings are otherwise more difficult to forecast. Second, disaggregation is more important after Regulation Fair Disclosure prohibited selective disclosure, especially for firms that were more affected because they had previously provided more private guidance. Finally, in contrast to common assertions in the prior literature, we find that in more recent years, disaggregation matters more for guidance that conveys bad news. Managers as well as researchers should be interested in evidence suggesting that financial analysts find disaggregation especially helpful in contexts where managers' credibility is particularly important.

Author: Bruce J. McConomy
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This paper assesses how the bias and accuracy of managers' earnings forecasts in prospectuses were affected by a 1989 regulation that required the forecasts to be audited by public accountants. Theory suggests that auditors' association with the forecasts would reduce positive (optimistic) bias, by reducing moral hazard. Regulators expected that the audit requirement would also improve the accuracy of the forecasts. Both predictions were tested using management earnings forecasts disclosed in prospectuses of Canadian initial public offerings. The results show that audited forecasts contained significantly less positive bias than reviewed forecasts, but there was only a marginally significant improvement in accuracy.Key Words: Initial public offering; Bias; Earnings forecast.

Author: Carla Carnaghan
Publisher:
ISBN:
Category :
Languages : en
Pages : 44

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Book Description
We examine management forecasts to determine whether Regulation Fair Disclosure has improved the quality and quantity of public disclosures. Management forecasts are voluntary, provide earnings guidance and are highly sought by investors and analysts. We find that the information disclosed by managers has improved in terms of frequency, specificity and verifiable information provided. We also find that Regulation Fair Disclosure has reduced information asymmetry, and information leakage prior to the release of the MEF. We find no evidence of greater returns volatility. Our results suggest that generally Regulation Fair Disclosure has achieved one of its stated goals of providing a more level playing field to all investors.

Author: Richard A. Cazier
Publisher:
ISBN:
Category :
Languages : en
Pages : 47

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Book Description
In this study we examine whether managers' voluntary forecasts of future earnings are consistent with the implicit forecasts of future earnings that underlie a specific mandatory accrual, the valuation allowance. This accrual relies heavily on managerial estimation and is also based, in part, on managers' private, forward-looking information. Thus, it provides an ideal setting to investigate the interplay between voluntary and mandatory financial disclosures. By examining the consistency between the voluntary and mandatory forecasts, we are also able to provide insight into whether the predictable accrual-related bias in voluntary earnings forecasts carries over into the mandatory forecast embedded in the valuation allowance. We then investigate whether the biased voluntary earnings guidance helps analysts and investors more accurately interpret the information in valuation allowance changes about future earnings expectations. To increase the power of our tests we utilize a sample of loss firms, which frequently record valuation allowances to fully or partially offset deferred tax assets.We first document that more than 62 percent of our sample of loss firms report valuation allowance changes and management earnings guidance that convey the same basic information about future earnings (i.e., either both forecast profit or both forecast loss). Thus, these voluntary and mandatory forecasts are largely consistent with each other. We then provide evidence that managers provide overly pessimistic forecasts for observations whose valuation allowance changes signal bad news about future earnings, but overly optimistic forecasts for observations whose valuation allowance changes signal strong good news about future earnings. Finally, our results suggest that managers' biased earnings forecasts actually help analysts and investors more accurately interpret the information about future earnings in valuation allowance changes. Our findings provide new insights into actions managers can take to improve investor and analyst processing of financial statement-based tax information.

Author: Bin Ke
Publisher:
ISBN:
Category :
Languages : en
Pages : 63

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Book Description
This study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to Regulation Fair Disclosure. Analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers. The effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard-to-predict earnings. The above results hold regardless of whether a brokerage firm has investment banking business or not. These results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management's private information.

Author: Stephen P. Baginski
Publisher:
ISBN:
Category :
Languages : en
Pages : 32

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Book Description
The 1990s were characterized by substantial increases in the performance of and investor reliance on financial analysts. Because managers possess superior private information and issue forecasts to align investors' expectations with their own, we predict that managers increased the quality of their earnings forecasts during the 1990s in order to keep pace with the improved forward-looking information provided by financial analysts, upon which investors increasingly relied.Using a sample of 2,437 management earnings forecasts, we document an increase in management earnings forecast precision, management earnings forecast accuracy, and managers' tendency to explain earnings forecasts in 1993-1996 relative to 1983-1986. Given that these forecast characteristics are linked to greater informativeness and credibility, we also document that the information content of management earnings forecasts, as measured by the strength of share price responses to forecast news, increased in 1993-1996 relative to 1983-1986. As expected, the increased information content of management forecasts primarily occurred for firms covered by financial analysts.