Management Forecasts,Financing Cost,and Corporate Innovation

Information disclosure is the cornerstone of the capital market and an important mechanism to protect the interests of investors.As a supplementary information disclosure mechanism in addition to the regular financial reports,management earnings forecasts provide investors with the important forward-looking information and play an important role in improving corporate transparency and capital market efficiency.This dissertation intends to further explore the economic consequences of such an information disclosure mechanism on the development of the real economy.This study first summarizes the evolution of Chinese semi-mandatory management forecast policy to lay the institutional foundation for the empirical research issues.Unlike the voluntary disclosure policy adopted by Western developed countries such as the U.S.,China's regulatory authorities have issued a series of policies and notices related to the management forecast since 1998,requiring some public firms to disclose their forecast information in a timely manner.In particular,in January 2012,the Shenzhen Stock Exchange required all GEM-listed companies to disclose quarterly and annual management forecasts.While the disclosure requirements for other companies remained unchanged.This exogenous policy shock provides a cleaner setting to examine the economic consequences of the management forecast.This paper takes the GEM listed companies that were newly mandated to disclose forecast news as the treatment companies,and choose the companies listed on the mainboard and SME board of which the disclosure behavior(whether to disclose)remains unchanged during the research period as the control group to empirically test the impact of management forecasts on firms' financing costs and innovation activities.(1)Management forecasts and corporate transparency.On the one hand,this disclosure mechanism releases earnings surprise in advance,mitigating the“expectation gap” that existed between the company and investors,thereby reducing the likelihood of missing the market expectations due to normal operating fluctuations.On the other hand,it can also improve the monitoring of external investors,curbing opportunistic earnings management behavior.The results show that: First,the disclosure of management forecast significantly improves corporate transparency;further analysis demonstrates that such positive effect of management forecast on firm transparency is more pronounced for small and medium-sized firms,private firms,high-growth firms,and those located in areas with relatively lower marketization.Finally,this study points out the positive role of the management forecast in alleviating information asymmetry among investors and improving the firms' information environment,providing more evidence for the transparency argument.(2)Management forecasts and the cost of debt.The management forecast mechanism provides creditors with more forward-looking information,which largely meets their information demand,reducing their information risks and information collection costs.At the same time,its positive effect on the quality of financial reports improves the efficiency of debt contracts and restrains the managers' opportunistic behavior,thereby reducing the risk of default.The results confirmed that the disclosure of the forecast information significantly reduced the cost of debt;further analysis shows that the positive effect of management forecasts on the debt cost is more pronounced in firms facing more information demand and with higher agency cost.The mechanism test further confirmed that the management forecast reduces the cost of debt by improving corporate transparency.(3)Management forecasts and the cots of equity.The management forecast mechanism reduces the information risk of investors.At the same time,it can weaken the information advantage of the insider,alleviating information asymmetry among investors,increasing their stock demand,and thus reducing the cost of equity.The results confirm the positive effect of management forecasts in reducing the cost of equity;further analysis shows that this positive effect is more significant for firms facing more information demand and with higher agency cost;the mechanism test demonstrates that management forecasts reduce the cost of equity capital by improving corporate transparency.(4)Management forecasts and corporate innovation.Based on the previous parts,this study further examines the impact of this information disclosure mechanism on corporate innovation to reveal its role in promoting the development of the real economy.The results show that the disclosure of management forecasts has significantly improved corporate innovation;further analysis shows that the positive effect is more significant in firms with more information demand and higher agency costs;the mechanism test confirms that the management forecasts improve corporate innovation by reducing the financing cost.The contributions of this paper are as follows: Firstly,this paper has identified the role of management forecast in driving corporate innovation,extending related research on the economic consequences of management forecasts.Secondly,this study reveals the positive effect of the mandatory management forecast policy,advancing the understanding of the positive role of the “visible hand” in corporate information disclosure.Thirdly,this study employs a regime change that arises from China's mandatory forecast policy and uncovers the causal link between management forecasts and corporate financing and investment activities.In addition,this study also has important practical implications.Unlike mature capital markets such as the U.S.,China's capital market has not been established for a long time.Chinese public firms suffer from an opaque information environment and higher agency costs,which in turn restricts the development of the capital market and the real economy.The establishment of mandatory management forecast mechanism is one of the measures taken by regulators to improve the transparency of public companies and protect the interests of investors.This paper confirms the positive effect of such mandatory disclosure policy,advancing the understanding of the implementation effectiveness,and providing evidence for the further revisions of related policies.