Disaggregated Management Forecasts and the Legal Environment: International Evidence

• In Event: Securities Litigation and Financial Reporting

Abstract

This study examines the credibility-enhancing effect of disaggregated management forecasts around the world and whether investors’ perception of such effect varies with country-level institutional environments. We find that disaggregated management forecasts are positively associated with stock market reactions, suggesting that more disaggregated forecasts are perceived to be more credible by investors globally. We also find that the credibility-enhancing effect of disaggregated forecasts is stronger for management forecasts issued by firms from countries with stronger legal and regulatory environments. This evidence suggests that investors infer the credibility of disaggregated forecasts from the expected litigation risk associated with the issuance of such forecasts in different countries. Further corroborating our results, we find that managers are less inclined to issue disaggregated forecasts in these countries. Finally, our results also show that among all the performance measures contained in management forecasts voluntarily issued by firms, forecasts which contain sales forecast or forecast of line-items above the bottom-line net income are considered by investors as more credible and hence elicit greater stock market reactions.

Authors

• Jeff Ng, The Chinese University of Hong Kong

• Albert Tsang, The Chinese University of Hong Kong - University L

• Oktay Urcan, University of Illinois at Urbana–Champaign