The impact of litigation risk on the strategic timing of management earnings forecasts

Abstract

This paper examines whether managers strategically time their earnings forecasts (MEFs) as litigation risk increases. We find as litigation risk increases, the propensity to release a delayed forecast until after the market is closed (AMC) or a Friday decreases but not proportionally more for bad news than for good news. How costly this behaviour is to investors is questionable as share price returns do not reveal any under-reaction to strategically timed bad news MEF released AMC. We also find evidence consistent with managers timing their MEFs during a natural no-trading period to better disseminate information.

Earnings benchmark hierarchy

“…We do not use management earnings forecasts, even though they form an important market expectation in the Australian continuous disclosure environment. This is because over half of management earnings forecasts are of a qualitative nature (Jackson et al ., ), which precludes the calculation of unexpected earnings.…”

How efficient is the market for Australian firms’ earnings information?

“…We track the evolution of the consensus analyst forecast on a daily basis. Starting our measurement at the beginning of the fiscal year allows for the impact of year t À 1's realised earnings on analysts' expectation of earnings for year t. Further, Jackson et al (2015) show that management earnings forecasts are made relatively early in the fiscal year, and typically are full-year forecasts. Beginning the measurement period at the start of the fiscal year also ensures we capture the effect of all earnings-relevant information, regardless of source, that becomes available throughout the fiscal year as well as the period between the year t fiscal year-end and the earnings announcement for year t.…”

A review of research on regulation changes in the Asia‐Pacific region

“…Similarly, in New Zealand, Dunstan et al (2011) find that subsequent to the introduction of continuous disclosure rules, firms in general are more likely to issue 7 Australia is noted for relatively low analyst following compared with the United States. Jackson et al (2015) note that only 38 percent of their sample have analyst coverage, while Carvajal et al (2015) report that 31 percent of Australian listed firms in 2012 are covered by analysts according to I/B/E/S. management earnings forecasts to pre-empt earnings announcements, implying that regulatory reforms may have greater benefits in low litigation environments.…”

“…management earnings forecasts to pre-empt earnings announcements, implying that regulatory reforms may have greater benefits in low litigation environments. Jackson et al (2015) extend these studies to examine whether increases in litigation risk affect the strategic timing of management earnings forecasts. Consistent with the theme in Dunstan et al (2011), they found that while the propensity to delay forecasts decreases with increases in litigation risk, this is a general effect and is not proportionately greater for bad news.…”