The effects of a mixed approach toward management earnings forecasts: Evidence from China

Abstract

Chinese regulators mandate management earnings forecasts when managers' earnings expectations meet bright-line thresholds and allow voluntary forecasts in other circumstances. We examine the effects of this mixed approach. We find that Chinese mandatory forecasts have significant information content. Moreover, we observe a learning effect: mandatory forecasts appear to stimulate voluntary forecasts in subsequent periods as managers become familiar with the forecasting and disclosing procedures through forced experience. We find one negative consequence of the mixed approach, however: managers appear to manipulate earnings to avoid the forecast threshold of large earnings decreases. Overall, we document the pros and cons of a mixed approach toward management earnings forecasts in a major emerging market.

Board directors with foreign experience and stock price crash risk: Evidence from China

“…Huang et al. (), Iwasaki, Otomasa, Shiiba, and Shuto (), and Brockman et al. () generally discuss the relation between incentives to be transparent with regard to information disclosure.…”

“…First, we contribute to the growing body of literature on the effects of corporate managers’ different individual experiences on financial decisions. Prior studies have focused on executive internal experience (Brockman, Campbell, Lee, & Salas, ), disaster experience (Bernile, Bhagwat, & Rau, ), military experience (Koch‐Bayram & Wernicke, ), pilot experience (Sunder, Sunder, & Zhang, ), academic experience (Jiang & Murphy, ), and mandatory management earnings forecast experience (Huang, Li, Tse, & Tucker, ), but are almost silent on individual foreign experience, especially in emerging markets like China.…”

The effect of international subsidiaries on voluntary disclosure - evidence from natural disasters

“…To construct our control group, we define 76,796 GUO-year observations where neither a subsidiary nor the GUO experiences a natural disaster. As management forecasts are mandated in Japan and China, we exclude GUOs from Japan and China (Li and Yang 2016;Naughton et al 2019;Huang et al 2018;Kato et al 2009). We further exclude GUOs from financial and utilities industries (two-digit SIC codes 49 and 60-69) and observations with missing data for our analysis.…”

Determinants of Management Earnings Forecasts: The Case of Global Shipping IPOs

“…Huang et al . () argue that capital market regulators must assess whether mandating management earnings forecasts will improve the information environment or be counterproductive. They examine the efficacy of forecast regulation in the emerging market of China, which allows earnings forecasts in some circumstances but mandates management earnings forecasts in others, such as anticipated losses, outsize profits, and large changes in earnings from the previous year.…”

“…Huang et al . () indicate that its mandate was one of the most significant corporate disclosure decisions in history, especially for small investors who have limited access to private information. Disclosure reduces the cost of capital for firms, and it can combat problems like asymmetric information and agency problems (Dye, ; Healy and Palepu, ).…”