Management Earnings Forecasts Research Articles

Corrigendum to “Environmental legal institutions and management earnings forecasts: Evidence from the establishment of environmental courts in China” [International Review of Economics and Finance 93 (2024) 545–573 IREF-D-23-00823]

Corrigendum to “Environmental legal institutions and management earnings forecasts: Evidence from the establishment of environmental courts in China” [International Review of Economics and Finance 93 (2024) 545–573 IREF-D-23-00823]

Top management team incentive dispersion and management earnings forecasts

Top management team incentive dispersion and management earnings forecasts

Digital Transformation and Management Earnings Forecast

This paper conducts an empirical examination using listed companies on China's Shanghai and Shenzhen A-share markets from 2010 to 2020. The findings indicate that digital transformation has a significant positive effect on the quality of management's earnings forecast. Mechanism analysis reveals that this effect is more pronounced in companies with lower internal control indices, higher levels of corporate governance, and higher agency costs. Digital transformation enhances the quality of corporate information disclosure and mitigates information asymmetry, further improving management's earnings forecast level. Through heterogeneity analysis, further research finds that companies lacking a technical background among senior executives, those in less competitive industries, those with poor growth, and non-state-owned enterprises, experience a more significant positive impact on the quality of management earnings forecasts from digital transformation. The conclusions provide new evidence for continuing to advance digital transformation and elucidate the benign cycle mechanism between the capital market and the national economy. This study also proposes new perspectives for the regulation of predictive information disclosure by enterprises.

Big Data Analytics and Management Forecasting Behavior

SYNOPSIS This paper investigates whether the use of Big Data analytics by firms has a spillover effect on management forecasting behavior. Insights provided by Big Data could potentially improve firms’ ability to forecast earnings (supply channel) and investor demand for earnings information is likely higher for firms engaging in data analytics (demand channel). Using a text-based measure of firms’ commitments to and usage of Big Data analytics, we find that Big Data analytics usage is positively associated with the propensity to issue management earnings forecasts. Consistent with the “supply channel” explanation, we find that Big Data analytics usage is positively associated with management forecast accuracy as well. Also, supporting the “demand channel” explanation, we find that Big Data analytics usage is associated with greater analyst following. Our findings of improved disclosure following commitments to Big Data analytics highlight a potentially unintended benefit of the Big Data revolution.

Credit ratings and management earnings forecasts: Evidence from the Dodd–Frank act

Credit ratings and management earnings forecasts: Evidence from the Dodd–Frank act

Peer Effects of Corporate Disclosures: Evidence From the Registration-Based IPO System in China

China launched the registration-based IPO system in 2019 whereby all firms listed on the newly established STAR board (“peer firms”) are required to disclose specific innovation and industry-related information in their prospectus. Using this event as a quasi-experiment, our study investigates the causal effects of peer firms’ disclosures on individual firms’ disclosure strategy. We find that the precision of individual firms’ management earnings forecast (MEF), both its form and width, significantly decreases when peer firms disclose more information during the IPO period. In cross-sectional analyses, we find this effect to be more pronounced for individual firms that are likely to experience greater competitive pressure from industry peer firms and firms with higher risks and performance uncertainty that make them more cautious to external competitive pressure. This result suggests that peer firms’ disclosures induce greater competitive pressure and uncertainty about future firm performance, triggering managers of individual firms to adopt a more cautious disclosure strategy. Overall, our study extends the literature on the peer effects in corporate disclosure decisions and documents potential unintended consequences of mandatory disclosure policies.

Management earnings forecast and technical innovation: the mediating effects of cost of debt

PurposeThis study examines whether a firm’s management earnings forecasts affect its technical innovation activities. Our study also examines whether the cost of debt plays a mediating role between the management earnings forecasts and the innovation nexus.Design/methodology/approachWe obtained data from 1,032 Chinese non-financial firms listed on the Shanghai and Shenzhen stock markets from 2005 to 2022 (i.e. 18,576 firm-year observations). We used various econometrics techniques, such as Heckman’s (1979) two-stage selection method and two-stage least square, to examine the relationship between management earnings forecasts and the firm’s technical innovation activities.FindingsWe find a positive relationship between management earnings forecasts and the firms' technical innovation. We also find that the cost of debt mediates the relationship between management earnings forecast and technical innovation. Further analysis indicates that frequent earnings forecasts provide incremental information regarding a firm’s future value and cash flows, thus reducing the volatility and uncertainty in cash flow calculations. Our findings are robust to several tests.Originality/valueOur study has implications for policymakers, practitioners and high-level management of Chinese firms, enabling them to understand the relationship between management earnings forecasts and firms' innovation activities.

Environmental legal institutions and management earnings forecasts: Evidence from the establishment of environmental courts in China

This paper investigates whether and how managers of highly polluting firms adjust their earnings forecast behaviors in response to the introduction of environmental legal institutions. Using the establishment of environmental courts in China as a quasi-natural experiment, our triple difference-in-differences (DID) estimation shows that environmental courts significantly increase the likelihood of management earnings forecasts for highly polluting firms, compared to non-highly polluting firms. This association becomes more pronounced for firms with stronger monitoring power, higher environmental litigation risk, and greater earnings uncertainty. Additionally, we show that highly polluting firms improve the precision and accuracy of their management earnings forecasts following the establishment of environmental courts. Furthermore, we provide evidence that our results do not support the opportunistic perspective that suggests managers strategically issue more positive earnings forecasts to inflate stakeholders' expectations subsequent to the implementation of environmental courts. Overall, our research indicates that environmental legal institutions make firms with greater environmental concerns to provide more forward-looking information, thereby alleviating stakeholders’ apprehensions regarding future profitability prospects.

Lead Independent Directors and Internal Information Environment

ABSTRACTResearch Question/IssueThis study explores the relationship between the presence of a lead independent director (LID) and firms' internal information environment. LIDs are elected independent members of the board who perform key duties for the independent directors and the board, including reviewing and approving board meeting agendas, chairing non‐executive board meetings, and acting as a liaison between the CEO and other independent directors. We hypothesize that LID presence lowers information barriers between the CEO and the rest of the board members, enabling more rapid information acquisition and integration and enhancing the internal information environment of the firm.Research Findings/InsightsUsing a sample of US publicly listed companies from 2001 to 2019, we document that LID presence on the board is positively associated with proxies of internal information quality that reflect better information acquisition and information integration: accuracy and precision of management earnings forecasts, speed of earnings announcement, and absence of material weaknesses in internal controls. These results are robust to alternative model specifications, including entropy balancing, Heckman two‐step correction for self‐selection bias, firm fixed effects, and placebo tests. Further analyses suggest that LIDs with financial expertise and audit committee memberships are more effective in positively influencing internal information quality. We also show that LID presence is positively associated with several proxies of external information quality.Theoretical/Academic ImplicationsWe build on agency theory to argue that LIDs improve internal information quality by reinforcing the information quality benefits of unified leadership while mitigating potential compromises in information quality arising from entrenchment. Similarly, we use arguments emanating from the novel strategic leadership systems theory to posit that a LID appointment facilitates the tasks of the CEO and the board, enhancing the effectiveness of both groups in their respective roles: the CEO in making operating and investment decisions and the board in strengthening oversight while bringing cohesion in their shared role of strategy visioning and implementation.Practitioner/Policy ImplicationsOur findings suggest that there is scope for shareholders to consider LID appointments as an addition to their firms' corporate governance structures to enhance the internal information environment and decision‐making efficiency. Policymakers can also encourage LID appointments on the board when promoting best practices in corporate governance through regulatory guidelines.

CEO compensation convexity and meeting‐or‐just‐beat earnings forecast

AbstractA line of research documents that corporate executives' compensation convexity relates to earnings management, the issuance of management earnings forecasts and firms' investing and financing decisions. Another stream of research demonstrates that executives manage earnings expectations downward to beatable levels. We bridge these lines of research by investigating how CEO compensation convexity affects expectation management, an important earnings reporting strategy. We hypothesise and find that compensation convexity plays an important role in inducing CEOs to adopt a meet‐or‐just‐beat earnings reporting strategy, which is implemented by downward expectation management.

Stock market liberalization and management earnings forecasts: Evidence from a quasi‐experiment in China

AbstractThis study examines the impact of Chinese stock market liberalization on the quality of firms' information disclosures. Although previous studies have explored the economic outcomes of stock market liberalization, little is known about its impact on the quality of management earnings forecasts. We treat China's Stock Connect program as a quasi‐experiment and draw data from Chinese A‐share‐listed companies from 2012 to 2017. Using a staggered difference‐in‐difference model, we find that eligible firms issue more accurate earnings forecasts after implementation of the Connect program compared with ineligible firms. Our mechanism analyses show that the positive effect is more pronounced for firms with initially opaque information environment and higher ex ante agency costs, suggesting that market liberalization facilitates higher‐opaque firms to issue more accurate earnings forecasts to meet the information demand from foreign investors, and facilitates monitoring in firms with weak internal governance, thereby improving earnings forecasts quality.

Information aggregation to form earnings expectations: Evidence from CEO networks and management forecast accuracy

AbstractWe investigate whether a larger CEO employment network provides access to information that improves firms' earnings forecasts and find a significantly positive relation between CEO employment network size and management earnings forecast accuracy. Our results suggest that firms use information obtained from CEO contacts to increase the accuracy of their earnings forecasts. Our conclusion is further supported by evidence of positive associations between CEO employment network size and the likelihood, frequency, and precision of management earnings forecasts. We also find that CEO employment network size is positively related to analysts' reactions to the forecast news and the accuracy of management earnings forecasts relative to analyst forecasts. Overall, our results are consistent with a larger CEO employment network generating external information that increases the accuracy of firms' earnings forecasts.

Loan guarantee, management earnings forecasts and cost of debt: evidence from Chinese manufacturing firms

Loan guarantee, management earnings forecasts and cost of debt: evidence from Chinese manufacturing firms

Board gender reforms and voluntary disclosure: International evidence from management earnings forecasts

AbstractResearch Question/IssueThis study examines the relationship between boardroom gender diversity reforms (BGDRs) and corporate voluntary disclosure in the form of management earnings forecasts (MEFs) in a sample of 43 countries over the period 2000 to 2020.Research Findings/InsightsTaking advantage of the staggered adoption of the gender diversity reforms that aim to improve women's representation on boards, we find that firms exhibit a greater propensity for and frequency of issuing MEFs. These findings hold for both governance‐based and legislation‐based reforms but are stronger for the latter. Furthermore, we find stronger results (a) when female directors possess higher financial expertise and serve on board sub‐committees, (b) when board activity (meetings and attendance) improved following BGDRs, (c) for firms that had all‐male boards before the reforms and where gender diversity increased shortly after the reforms, and (d) for countries with greater legal enforcement and gender equality. Our findings are robust using the stacked difference‐in‐differences approach and alternative samples, models, and fixed effects. In addition, we find that, after the reforms, there is an increase in the forecast horizon, forecast width, bad news disclosure, accuracy, and the number of disaggregated forecast items.Theoretical/Academic ImplicationsOur study provides the first international and comprehensive evidence of the positive role of board gender reforms in the corporate information environment and offers vital policy implications.Practitioner/Policy ImplicationsOur study informs the ongoing debate regarding the effectiveness of and business case for gender diversity reforms. By documenting a causal link between BGDRs and voluntary disclosure, our study provides important implications for policymakers, regulators, investors, and top management teams.

The Opioid Crisis, Employee Health Capital, and Corporate Information Production

This study examines the effect of employee health on corporate information production. Utilizing exposure to opioid abuse as the proxy for employee health, we find that firms headquartered in counties of high opioid prescription rate produce significantly less accurate management earnings forecasts. This result is robust to controlling for other dimensions of human capital and to utilizing the effective anti-opioid legislation across states as a plausibly exogenous variation that limits the prescriptions of opioid. The negative effect of opioid abuse is stronger for firms facing higher forecast difficulty, and is mitigated for firms with easier access to opioid treatment, for firms with superior employee welfare policies, and for firms with a corporate social responsibility (CSR) committee. We also show that managers delay earnings announcements and reduce forecast precision amidst high local opioid activity. Finally, we show that investors react less strongly to news in forecasts issued by firms located in high opioid areas, consistent with their recognition of the potential adverse effect of opioid abuse on information production within the firm.

Auditor changes and management's issuance of earnings forecasts

AbstractAuditor changes are significant corporate events marking disruptions in the auditor‐client relationship. Prior studies have primarily examined the impact of such changes on audit quality and investment decisions of market participants. We study the effect of auditor changes on the voluntary disclosure of forward‐looking information. Managers may choose to reduce disclosure due to the possible adverse effect of the disruptions on disclosure credibility. Alternatively, shareholders may demand increased disclosure to intensify monitoring, as the auditor change signals potential issues between the company and the auditor. Employing multiple identification strategies, we find that firms are less likely to issue management earnings forecasts (MEFs) following auditor changes. We also find that governance quality mitigates the negative impact of auditor changes on the issuance of MEFs. Additionally, auditor changes are associated with lower market reactions to forecast releases. The overall evidence is consistent with the notion of reduced forecast credibility. Lastly, we conduct cross‐sectional analyses on characteristics of the auditor changes and find evidence consistent with signaling and anticipated successor audit quality to be underlying mechanisms for the association between auditor changes and MEFs. Our study provides the first large sample evidence that auditor changes have a disruptive effect on the voluntary disclosure of forward‐looking information.

The Impact of Upstreamness on Investment Quality in Multitier Supply Chains

ABSTRACT In this study, we explore the negative impact of upstreamness on suppliers’ investment quality and management earnings’ forecast accuracy and investigate whether a shared auditor engaged by both a supplier and its major customers could mitigate these effects. Using a comprehensive dataset of multitier supply chains, we find that suppliers located further upstream tend to have lower investment efficiency and exhibit less accurate management earnings forecasts. However, our results also show that the presence of a shared auditor in the supplier-customer pair could alleviate these adverse impacts by enhancing the quality of information in the supply chain. Our findings shed light on the implications of upstreamness in the supply chain, such as reduced investment efficiency and increased management forecast errors and suggest a role for information quality in mitigating these consequences. Data Availability: All data are available from public sources mentioned in the text.

Unexpected management forecasts and future stock returns

AbstractThis study investigates the effect of managerial discretion regarding initial earnings forecasts on future stock returns for Japanese firms. We estimate the unexpected portion of initial management earnings forecasts (“unexpected forecasts”) based on the findings of fundamental analysis research and define it as a proxy for forecast management. Using this measure, we find that firms with higher unexpected forecasts are related to negative abnormal returns over the subsequent 12 months. By contrast, the expected portion of earnings forecasts is not related to future abnormal returns. These results suggest that the market tends to appropriately price the credible portion of management forecasts, while overpricing the less credible portion. Further analysis reveals that the relationship between unexpected forecasts and future returns is (1) distinct from accruals anomaly, notably (2) in the 6‐month return window, (3) in the first half of the sample period (especially in 2005 and 2006), (4) in extreme unexpected forecast news and (5) in a poor information environment. This study extends the literature by focusing on a more desirable research setting in Japan, compared to other studies, to explore management forecasts and present new implications for the market pricing of management earnings forecasts.

Corporate governance reforms and voluntary disclosure: International evidence on management earnings forecasts

This study examines whether and how a country’s implementation of corporate governance reforms affects the propensity and properties of management earnings forecasts. We propose competing hypotheses that the implementation of corporate governance reforms will either increase or reduce the likelihood of management earnings forecasts. Our sample includes public firms from 22 countries spanning from 2004 to 2009. Using a difference-in-differences (DID) research design and logistic regressions, we compare the change in earnings forecast practices between firms domiciled in countries that implemented corporate governance reforms and firms domiciled in countries that did not. We find that the implementation of corporate governance reforms in a country increases the propensity of firms in that country to issue earnings forecasts. However, the implementation of corporate governance reforms in a country does not significantly influence the quality of earnings forecasts issued in the post-reform period. Also, the effect of reforms on the level of earnings forecasts issued by firms is greater for countries adopting the comply-or-explain type of reform, for firms in countries with a weaker level of pre-reform corporate governance, and for countries with a common law legal origin. Overall, our findings shed light on how strengthened corporate governance affects firms’ voluntary disclosure practices.

CSRC’s random inspection and capital market information efficiency: an empirical evidence from stock price synchronicity

ABSTRACT The random inspection of the China Securities Regulatory Commission (CSRC) is an important policy for practicing “standardizing regulatory behavior and innovating management modes”. This study investigates how CSRC’s random affect capital market information efficiency from the perspective of stock price synchronicity. Using a sample of China’s non-financial A-share firms from 2013 to 2019, we find that random inspections significantly reduced the stock price synchronicity of inspected firms. Random inspections could increase the probability of releasing management earnings forecasts, media coverage and investor attention, and thereby improve information efficiency. Further study finds that the effect of random inspections on stock price synchronicity is stronger for non-state controlled firms, districts with more listed firms, and districts with more transparent government. This study enriches the literature on the consequences of random inspections and extends our knowledge of the relationship between regulatory innovations and the information efficiency of the capital market.