Accruals Quality, Disclosure Costs, and Management Guidance

Abstract

Research examining managers’ propensity to provide earnings guidance generally focuses on external costs and benefits of such disclosure. Motivated by voluntary disclosure theory, I argue that internal costs of disclosure likely play a significant role in the forecasting decision. Prior research suggests accruals quality (AQ) provides an indication of the quality of managers’ earnings-related information, as accruals that are of higher (lower) quality presumably arise from higher (lower) quality information. I contend that innate and discretionary components of AQ have opposite relations with information acquisition costs, an important theoretical determinant of disclosure. Specifically, higher levels of innate AQ suggest managers bear low information acquisition costs, leading to a positive theoretical association with voluntary disclosure. Conversely, higher discretionary AQ indicates greater information acquisition costs, which offsets the benefit of high quality information. Using forecast occurrence, frequency, timeliness, and specificity as proxies for the quality of voluntary disclosures, I find evidence consistent with these predictions. Further, improvements in innate AQ correspond to a higher (lower) likelihood of starting (stopping) a policy of forecasting. Finally, I show that the quality of “low-cost” information (innate AQ) moderates the effects of several previously identified determinants of forecasting, including institutional holdings, abnormal audit fees, product market competition, and litigation risk. Overall, my results are consistent with theory suggesting information acquisition costs play important roles in managers’ forecasting decisions.