Disclosure Of Forward-looking Information Research Articles

SEC Market-Risk Disclosures: Enhancing Comparability

In 1997, the U.S. SEC mandated through Financial Reporting Release No. 48 (FRR48) the disclosure of forward-looking market risk information. Because of the recency of the required risk disclosures, little has been written about them or about how analysts might use them. FRR48 allows three disclosure formats—sensitivity measures, value at risk, and a tabular format. The issue is that variations among the disclosure formats and the discretion allowed about assumptions underlying sensitivity and VAR measures may impair analysts' use of the disclosures. We demonstrate how sensitivity and VAR measures can be derived from the tabular format. Our methodology allows financial analysts to derive risk measures based on consistent assumptions among companies. Tabular data provide a common denominator by which companies may be compared and provide a means of overcoming the limitations of sensitivity and VAR measures.

An Experimental Investigation of Forward-Looking Non-Financial Performance Disclosures

The AICPA's Special Committee on Financial Reporting has urged disclosure of relevant forward-looking and non-financial information to supplement conventional financial statements. We conduct an experiment consisting of 20 laboratory security markets with eight participants each to assess the effects of such disclosures on capital allocation decisions. We observe four markets in each of five accounting information conditions: a baseline condition with an income statement and balance sheet only and four conditions that combine this baseline with supplemental disclosures of proved reserves (a best estimate), total reserves (an upper bound), and minimum reserves (a lower bound). We find first that proved reserve disclosures improve capital allocation decisions, even though these disclosures are redundant with information in the primary financial statements. Second, disclosures of the upper bound (total reserves) in the absence of lower bound (minimum reserves) has the potential to bias security prices upwards, while disclosures of both total and minimum reserves remove this bias. Third, a comparison of individual price predictions to actual market prices reveals both a systematic prediction error and a differential effect of supplemental disclosures on security prices, suggesting that experimental investigations of capital allocation decisions should include market settings. The paper concludes with a discussion of implications for accounting standard setters.

The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information by High Technology Firms

This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using data on earnings and sales forecasts issued by 547 computer, software, and drug firms, we find that there was a significant increase in both the frequency of firms issuing forecasts and the number of forecasts issued following enactment of the Reform Act. The increased level of disclosure is primarily attributable to managers issuing more long horizon forecasts of good news and short horizon forecasts of bad news. Moreover, there is some evidence that the forecasts issued after the safe harbor took effect specified a more precise estimate of expected future earnings performance. We also find that the increase in disclosure was not at the expense of forecast quality in that forecasts issued after passage of the Reform Act are no less accurate than those issued previously. In particular, there is no evidence to support critics' concern that the protection of the safe harbor would prompt managers to issue more overly optimistic statements to investors.

The limits of required forward-looking information in MD & A

The SEC's May 1989 Interpretive Release on disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations helped spark intense scrutiny of the accounting treatment and disclosure of environmental uncertainties, unrealized market losses on investment securities, and other known matters that may be expected to affect future financial results. Since the Release, MD&A disclosure of forward-looking information has increased, but the limits of required disclosure of such information remain uncertain and highly controversial, despite the continued emphasis by the SEC on such disclosure.