Forward-looking Disclosure Research Articles

Quality versus Quantity: The Case of Forward-Looking Disclosure

Empirical studies do not make a clear distinction between the quantity and quality of disclosure. As it is generally assumed that the quantity of information has an implication in determining its quality, quantity measures are often used as proxy for disclosure quality. Nonetheless, the measurement of the quality of disclosure is recognized as a relevant question that is still open and the importance of developing measures of disclosure quality is emphasized in literature. This paper disputes the idea that the quantity of disclosure is a sound proxy for the quality of disclosure. The adoption of multidimensional frameworks for the appreciation of disclosure is discussed and an index for quality disclosure is proposed. Moving from the assumption that high-quality information should usefully support external users in the judgment of past and future performance, we hypothesize that high-quality disclosure is positively associated with accuracy and negatively associated with the dispersion of analysts' earnings forecasts. We show analytically that the proposed framework captures dimensions of annual report disclosure that are considered useful by financial analysts in forecasting earnings and that the proposed measure of disclosure quality has a stronger positive statistical association with accuracy and a stronger negative association with the dispersion of financial analysts' earnings forecasts than a simple index of disclosure quantity has.

Voluntary Forward-Looking Disclosure by Target Companies in Proxy Contests*

Voluntary Forward-Looking Disclosure by Target Companies in Proxy Contests*

Renegotiation-Proof Contracting, Disclosure, and Incentives for Efficient Investment

Disclosure by firms would seem to reduce the informational asymmetry that is a cause of investment inefficiency in firms. However, the effect of disclosure is subtle, especially when the link between disclosure and firm value is endogenous and depends on incentives within the firm. We analyze various disclosure regimes and determine which ones are effective in a model with optimal renegotiation-proof contracts. Disclosing only accepted contracts is not effective, but either full transparency of all compensation negotiations or, more reasonably, additional disclosure of a forward-looking announcement is effective. The model is robust to renegotiation in equilibrium and is also robust to changing who offers any renegotiation. The analysis illuminates optimal disclosure regulation. For example, it tells us that allowing forward-looking disclosure is beneficial provided we are in an environment that produces the optimal contract, which gives the manager an incentive for truth-telling.

The Impact of Regulatory Framework on Management Commentary Reports

This study investigates the extent of comparability of managers’ disclosure in Management Discussion and Analysis (MD&A) or Operating and Financial Review (OFR) reports and explanatory factors for disclosure. We performed a content analysis on the financial year 2003 reports of 172 listed companies from five industry groups from the U.S.A, Canada, the United Kingdom and Australia using a self-constructed disclosure checklist based on recommendations or requirements of securities regulators and standard setters. The results show that, despite international competitive market pressures to converge accounting standards and financial disclosure, management commentary information strongly reflects the country in which it is produced. The U.S. companies provide more financial and quantitative information and U.K. companies provide more non-financial and qualitative information. Although smaller, Canadian companies provide relatively high levels of disclosure while Australian companies do not. Many variables identified in prior literature as explanatory factors for disclosure are associated with financial and quantitative disclosure but provide little insight into managers’ use of forward-looking, non-financial and qualitative disclosures.

Strategic Plan Presentations to Financial Analysts: The Effects on Earnings Forecasts' Revision and Cost of Capital

There are different ways through which managers can interact with the financial community in relation to the quantity-quality of information released and the way in which it is disclosed. On the one hand, managers should at least meet regulatory requirements in financial reporting and in the announcements to the stock exchange, then, exceeding these requirements, meet standards of good practice and the usually higher expectations of users of financial information. On the other hand, managers can choose their own communication tools to disclose information: annual and interim reports, operating and financial reviews, earnings announcements and earnings forecasts, corporate presentations, etc. Among the different ways to communicate information to the financial community, we focus on strategic plan presentations (i.e. corporate presentations focused on the disclosure of strategic plans) because of their broader scope with respect to earnings announcements and earnings forecasts and their forwardlooking orientation. Although strategic plan presentations contain historical information (e.g. information on the realized strategy, on the investments carried out, on the achievement of business and financial targets, etc.) they focus on presenting corporate strategy and linking forward-looking verifiable statements (profit targets, future investments, growth, etc.) with narrative information (e.g. on external environment, on business and financial objectives by segments, on action plans, etc.) with the aim of explaining the firm’s strategy to the financial community and adding credibility to the managerial earnings forecasts. The central role of strategic plan presentations can also be explained by the fact that evaluation models used by financial analysts are future-oriented and, more generally speaking, the demand for forwardlooking information, especially on the assumptions that lead to the expected results and on the sustainability of performance, have increased over time. Prior studies document the usefulness to analysts and investors of earnings forecasts released by managers through press releases and earnings announcements and find that they often use attributions to explain their forecasts. Although previous research acknowledges that strategic plan can act as consensus catalysts inside and outside the firm, their effects on analysts expectations have not been studied in depth. In this paper, we analyse strategic plan presentations to financial analysts of firms listed at the Milan Stock Exchange from 2003 to 2006. The Italian setting is of particular interest because Italy has been operating in a transition from a taxation and debtor driven accounting system towards investor-led accounting and because the financial market has been changing from a relatively underdeveloped regulatory setting, characterised by a low level of investor protection, towards one typical of more advanced financial markets. We study the characteristics of the strategic plan presentations, the attributes of the plans presented as well as the type of information disclosed and verify whether they are associated with analysts’ earnings forecast properties, with earnings forecasts’ revisions and with the cost of capital. In particular we examine if narrative forward-looking disclosures, which should explain managerial earnings forecasts, are associated with financial analysts’ activities.

Voluntary Forward-Looking Disclosure by Target Companies in Proxy Contests

Voluntary Forward-Looking Disclosure by Target Companies in Proxy Contests

Forward-Looking Disclosure in Italy: An Analysis of Company Announcements

There is a consensus that the disclosure of information with a forward- looking perspective is essential in order to help stakeholders - and especially investors - in forming opinions on corporate performance. Perspectives and forecasts are disclosed through several documents and financial statements, such as IPO prospectuses, annual reports, interim reports and strategic plans.In recent years, Italian researchers have focused their efforts on forward- looking information provided in annual reports and strategic plans. This paper shifts the focus on company announcements, that represent a consolidated research topic in international literature but have been looked at by little research in Italy. They are a very important source of forward-looking information because of their timeliness and because companies have to disclose every kind of price sensitive information through them.The primary purpose of this study is to investigate what kinds of forecast information are disclosed in company announcements. To achieve this objective, announcements issued by a sample of Italian listed companies are analyzed with regard to categories based on the standard format required by the Italian Stock Exchange. A first analysis concerns the kind of announcement which forward- looking information are provided in (e.g. approval of an interim report). Then, forward-looking information provided in announcements are examined with reference to their estimate degree (forecast/objective), the covered topics, the disclosure of quantitative data and of underlying hypotheses.This study represents a preliminary attempt to advance our understanding of forward-looking disclosure with reference to the role of company announcements in corporate communication strategy. It also provides a basis for further research regarding the accuracy and the determinants of forward-looking information.

To Guide Or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance

In recent years, quarterly earnings guidance has been harshly criticized for inducing managerial short-termism and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance - decreased earnings, missing analyst forecasts, and lower anticipated profitability - is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long-term investment once managers free themselves from investors' myopia. Contrary to the claim that firms would provide more alternative, forward-looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.

Do the Merits Matter More After Securities Litigation Reform? Evidence from Restatements, Earnings Forecasts, and Insider Trading

This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with expectations, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and insider selling after the PSLRA. There is no evidence, however, of an association between litigation and abnormal insider selling either before or after the PSLRA, even though this measure conforms more closely with legal standards for assessing fraudulent intent. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements and abnormal insider selling. Thus, unlike lawsuit filings, the outcome of litigation does conform with judicial doctrine regarding insider trading. Consistent with Skinner (1997), there is no association between the likelihood of settlement and firms' forward-looking earnings disclosures.

Civil Liability for Forward-Looking Disclosure

Civil Liability for Forward-Looking Disclosure

Forward-looking Earnings Statements: Determinants and Market Response

This paper identifies cross-sectional factors that motivate the disclosure of forward-looking earnings information and documents that these disclosures impact market prices by future earnings information. We examine a set of firms facing poor current earnings performance, undervaluation concerns, investor neglect and extreme pessimism and find significant cross-sectional variation regarding whether these firms provide forward-looking earnings information to correct market misperceptions in advance of the earnings announcement. Consistent with existing theory, firms with stronger and more persistent earnings news are more likely to provide forward-looking disclosures during the turnaround period. Moreover, we find that firms operating in high litigation industries, possessing strong institutional ownership, having greater stock option-based compensation and facing larger non-equity stakeholders are more likely to provide disclosures. Alternatively, we find evidence that the use of alternative financial signaling mechanisms (share repurchases and dividend increases) lowers the probability that managers will make forward-looking disclosures. Market-based tests indicate that the disclosed information is value-relevant. The market responds in a significantly positive manner to forecasts of earnings (i.e., forward-looking statements provided outside of earnings announcements) as well as to forward-looking statements bundled in current earnings announcements (after controlling for the current period's earnings information). Furthermore, these responses are positively correlated with future seasonally-adjusted changes in earnings, indicating the disclosures are effective in pulling forward future mandatory information. Finally, the market reaction to the announcements of previously preempted earnings is less than that of unpreempted earnings, providing additional evidence that the disclosures are effectively pulling-forward the eventual mandatory earnings information.

Do the SEC's Safe Harbor Provisions Encourage Forward-Looking Disclosures?

Recent surveys indicate that CEOs are reluctant to make disclosures of forward-looking information because they believe these disclosures expose them and their firms to stockholder litigation. Partly as a result of these claims, the SEC has recently called for testimony on whether the current safe harbor provisions are effective in encouraging corporate managers to disclose voluntarily forward-looking information. Evidence from the voluntary disclosure literature suggests that legal liability concerns have important effects on managers' voluntary disclosure choices and that these concerns often prevent managers from issuing earnings forecasts. By strengthening the safe harbor provisions to reduce the expected legal costs of disclosure, the SEC can increase the extent to which managers voluntarily disclose forward-looking information.

The Voluntary Inclusion of Forecasts in the MD&A Section of Annual Reports*

Abstract. In this study, we appeal to theories advanced by Darrough and Stoughton (1990) to enhance our understanding of why some firms may voluntarily include directional forecasts in their annual reports while others do not. The data are consistent with their predictions that a firm's disclosure policy reflects its concern for both financial market valuation and product market competition. We find that for “good news firms, the probability of forecasting is increasing in the financing requirements but decreasing in the threat of competitor entry. The converse holds for “bad news” firms. These results lend further empirical support to the observation that the familiar good news hypothesis tested in the management earnings forecast literature offers only a partial explanation for the decision to forecast. Interestingly, however, even after controlling for financial and product market considerations, an overall voluntary disclosure bias still exists in the data. The data also provide support for the OSC's concern about a voluntary disclosure bias. Only 17.5 percent of our sample forecasts represent revisions downward relative to the previous year's results. However, in contrast to the OSC's concern about a general lack of forward‐looking disclosures in annual reports, 35.9 percent of our sample firms include directional forecasts in their MD&A or elsewhere in the annual report.