The Effect of Conditional Management Earnings Forecast Mandates on Voluntary Disclosure and Analyst Forecast Properties

Abstract

This study examines the effect of a conditional management earnings forecast mandate on voluntary disclosure and the properties of analyst forecasts in China, where firms are required to provide earnings forecasts when they expect to either make a loss, turn from loss into profit, or experience a large change in earnings. We find that firms' propensity to issue voluntary management earnings forecasts is higher when they anticipate the disclosure of mandatory management earnings forecasts in the future. This relation is stronger for government-controlled firms. We also find a significant improvement in the quality of analyst earnings forecasts (measured by forecast accuracy and dispersion) for firms that provide voluntary management earnings forecasts, while the disclosure of mandatory management earnings forecasts is negatively associated with analyst earnings forecast quality. We document that this differential effect on analyst earnings forecast quality is attributable to the higher quality of voluntary management earnings forecasts. Further analyses suggest that the positive effect of voluntary management earnings forecasts on analyst earnings forecast quality is larger for firms with a relatively weak existing information environment. Our findings suggest that the conditional mandatory disclosure of management earnings forecasts can incentivize managers to provide voluntary forecasts, and that these voluntary forecasts play a greater role than mandatory management forecasts in improving firms' external information environment in the Chinese capital market.

Conditional Mandates on Management Earnings Forecasts: The Impact on the Cost of Debt

“…To test this conjecture, we directly compare the accuracy, precision, and timeliness of MEFs between voluntary and mandatory forecasters. Following prior research (e.g., Huang et al ., 2018; Zhu et al ., 2022), we measure MEF accuracy ( MFACCURACY ) as the absolute difference between the forecasted earnings and actual earnings announced, scaled by absolute value of the actual earnings, and then multiplied by –1. A high value for MFACCURACY indicates higher management forecast accuracy.…”

“…In subsequent years, the conditions under which firms must issue MEFs underwent a series of extensions, with these conditions being finalized in 2006. Specific to these disclosure rules, all publicly listed corporations are currently required to issue annual MEFs when they expect the following of the current year earnings: (1) to be a loss; (2) to turn to profit after experiencing a loss in the prior period; or (3) to increase or decrease by more than 50% compared with the previous year's earnings (Zhu et al ., 2022). Firms are encouraged to provide MEFs on a voluntary basis when their expected earnings do not satisfy the thresholds for mandatory disclosure.…”

Corporate Governance Reforms and Analyst Forecasts: International Evidence

“…In addition, corporate disclosures are an important input to analysts’ information set (Luo et al ., 2023; Tsang et al ., 2022a). Analysts who use corporate disclosures to make their forecasts achieve higher forecast accuracy when the quality and quantity of firm‐provided disclosures improves—for example, when the readability of annual reports is enhanced and more management earnings forecasts are issued (Ashbaugh and Pincus, 2001; Byard et al ., 2006; Frankel et al ., 2006; Hope 2003a, 2003b; Lang and Lundholm, 1996; Lehavy et al ., 2011; Zhu et al ., 2022). Therefore, we hypothesize that analysts could base their analyses on more accurate, timely, and intensive corporate disclosures following the implementation of corporate governance reforms and thereby provide more accurate forecasts.…”

“…Firms may improve their governance practices following the initiation of such reforms and therefore mitigate agency conflict between managers and investors (Fama and Jensen, 1983; Jensen and Meckling, 1976). Following the better alignment of managers’ interests with those of investors achieved through better corporate governance, managers are likely to increase the quantity and quality of their financial disclosure (Ajinkya et al ., 2005; Chen and Jaggi, 2000; Karamanou and Vafeas, 2005), which analysts can use to enhance their forecast accuracy (Byard et al ., 2006; Lehavy et al ., 2011; Zhu et al ., 2022). Thus, given that analysts are able to base their analyses on more accurate and intensive corporate disclosures following corporate governance reforms, the reforms are expected to improve analyst forecast accuracy.…”

Does the market reward meeting or beating analyst earnings forecasts? Empirical evidence from China

“…We control for government control ( GVT ) and expect its coefficient to be negative because Wang and Shailer's (2018) meta-analysis shows that, compared with private ownership, government ownership is associated with inferior performance. GVT is a dummy variable that equals 1 if a firm is ultimately controlled by either the central or a local government, and 0 otherwise (Wang, Wu, & Sun, 2021; Zhu, Wang, & Wilson, 2021). We include ROA and earnings-to-price ratio ( ETP ) to control for accounting performance.…”