Management earnings forecasts: A theoretical and empirical analysis

This research analytically and empirically examines a manager's decision to issue earnings forecasts. The manager's forecast disclosure decision is modeled by focusing on the impact on the expected cost of litigation against the firm. The model is then used to generate empirically testable hypotheses.; Consistent with prior empirical findings, the model establishes the existence and uniqueness of an equilibrium threshold level such that managers are willing to disclose information signal realizations below the threshold level and withhold realizations above it. The model also suggests that the forecast disclosure decision depends on the precision of information signal the manager receives. In empirically testing the implications of the model, I identify two factors (managerial competence and product dynamism) that are likely determinants of information quality and examine their effect on the decision to issue an earnings forecast, the form of the forecast and the news conveyed by the forecast.; The results suggest that managers who are likely to generate high quality information signals issue significantly more good news forecasts than managers who are likely to generate low quality information signals. In addition, managers who are likely to generate low quality information signals have a greater propensity to disclose bad news than good news.; The analysis also suggests that the occurrence of earnings forecast and the form of the forecast is positively associated with the proxies for managerial competence and negatively associated with the proxies for product dynamism and the amount of order backlogs.; These results have important implications in understanding differential disclosure practices by firms. This understanding is vital in light of the current debate on expanding the scope of the reporting model to include forward looking information.