Management earnings forecasts in a continuous disclosure environment

• Published in: Pacific accounting review 2007-02, Vol.19 (1), p.5-30
• Main Authors: Chan, H., Faff, R., Ho, Y.K., Ramsay, A.
• Format: Article
• Language: English
• Subjects: Australia; Costs; Disclosure; Earnings; Earnings forecasting; Financial forecasting; Hypotheses; Investigations; Investments; Legal fees; Regression analysis; Scholarships & fellowships; Studies
• ISSN: 0114-0582; 2041-5494
• DOI: 10.1108/01140580710754629

Purpose - The purpose of this paper is to assess management earnings forecasts in a continuous disclosure environment.Design methodology approach - A large sample of hand checked Australian management earnings forecasts are examined. These data are analysed using a series of logistic regressions. Hypotheses are proposed and tested based on Skinner's litigation cost hypothesis. Increases in non-routine management earnings forecasts post-2000; and increases in the proportion of such forecasts that contain bad news are predicted. The relationship between forecast specificity and forecast news content is investigated.Findings - It was found that, post-2000, legislative changes and increased enforcement action by ASIC were followed by increased disclosure of non-routine management earnings forecasts. For routine forecasts, no significant increase in forecast disclosure is observed. This result is consistent with Skinner as is the finding that the increased disclosure is only apparent for bad news non-routine forecasts. For the second objective, evidence was found that the larger the gap between market expectations and actual performance the more specific the forecast, but only for bad news forecasts.Originality value - The study extends the small amount of research investigating the characteristics of management earnings forecasts. It also provides an assessment of the effectiveness of efforts by ASIC to ensure that management meet their continuous disclosure obligations.