Market Disruption and Managerial Responses: Evidence from Financial Reporting and Management Forecasts

• In Event: Voluntary Disclosure

Abstract

We examine managers' decisions on voluntary disclosure and earnings management in response to exogenously driven stock-mispricing. Using mutual fund fire sales as an exogenous source of market-disruption and stock-underpricing, we find some managers increase frequency/precision of voluntary earnings forecasts, while others resort to accrual-based earnings management. Earnings forecasts are favored by firms with stronger operating performance, institutional/block-ownership, takeover defenses and weaker CEO incentive-contracts. Post SOX and Regulation FD, firms are more likely to rely on earnings forecasts. Only earnings forecasts are associated with faster price recovery, suggesting that information disclosure rather than information manipulation is effective in correcting stock-mispricing.

Authors

• Jinglin Jiang, Rutgers Business School

• Vikram Nanda, UT-Dallas

• Steven Xiao, UT-Dallas