Terrorism Activities and Management Forecasts

Abstract

We study the effect of terrorist attacks on the disclosure policies of local firms. We find that the managers of firms located closer to the epicenters of the attacks are more likely to issue optimistic earnings forecasts relative to the managers of a control group of unaffected firms. The exposure-effect on managerial optimism intensifies for firms with stronger geographic focus, more uncertain fundamentals, larger R&D expenditures, and greater need for external equity financing. More capable managers tend to be more optimistic following a terrorist event. Our results are consistent with the idea that earnings forecasts are used by managers to counterbalance negative investor sentiment in capital markets.