AAA Spark Meeting of the Regions

Firm Life Cycle and Management Earnings Forecasts Behavior *

• In Event: DSFI/SE - Session 1 (Archival)

Abstract

This study examines how the voluntary disclosure practice as proxied by management earnings forecasts varies by firm’s life-cycle stages. Specifically, I examine if the probability to disclose, initiate, and stop disclosing management earnings forecasts varies across life cycle stages. I also examine if the management earnings forecasts characteristics vary across life cycle stages. For a sample of U.S. firms over the 2000-2021 period, I find that firms in the growth stage have a higher likelihood of issuing guidance, whereas the likelihood that firms in the introduction stage provide earnings forecasts is lower. Moreover, growth stage firms have a higher probability of initiating earnings guidance, while there is a higher likelihood that firms in the introduction, shake-out, and decline stage may stop providing guidance. I also find that earning forecast error is higher throughout the shake-out phase and firms at this stage estimate earnings with heightened optimism, suggesting that shake-out stage firms tend to be more biased as growth slows down. Firms in the introduction stage of their life cycle tend to project earnings with a positive outlook and forecast more good news regarding future earnings. However, growth stage firms tend to be more conservative by issuing more meetable or beatable management earnings forecasts. Finally, I find that the market is reacting uniformly to management earnings forecasts at different life cycle stages, consistent with firms facing potential cost-benefit tradeoffs in their disclosure decisions. Overall, the results suggest that managements’ decision to disclose earnings forecasts and the characteristics of earnings forecasts vary by life cycle stages.

Authors

• Suzanne Mullinnix, AAMVA

• Tanzila Upama, Florida Atlantic University