The Effects of Enhanced Disclosure Requirements on Management Guidance Quality

• In Event: Factors Facilitating Disclosure: Unraveling, Career Concerns and Regulation

Abstract

We investigate the effects of requiring managers to provide contemporaneous explanations with forecasts and to ex-post provide an analyses of their guidance error by examining the impact of a 2010 change in Brazilian regulation that required both. We posit that these new requirements increase accuracy and credibility of management forecasts by affecting managerial accountability. That is, we expect managers to be less prone to disclose biased estimates when they have to contemporaneously state their forecasting assumptions, and also commit to later explain why their numbers were inaccurate. Consistent with our predictions, we find that forecasts become more accurate following the regulation change. In addition, investors appear to recognize this change in managerial incentives and react more to management forecasts. We also find that managers decrease the proportion of long term forecasts and shift from point to range initial forecasts. This suggests that the regulation had the unintended consequence of decreasing precision and horizon.

Authors

• Gregory S Miller, University of Michigan-Ann Arbor

• Nayana Reiter, University of Michigan