The Effect of Legal Environment on Voluntary Disclosure: Evidence from Management Earnings Forecasts Issued in U.S. and Canadian Markets

Abstract

Citing fear of legal liability as a partial explanation, prior research documents (1) managers' reluctance to voluntarily disclose management earnings forecasts, and (2) greater forecast disclosure frequencies in periods of bad news. We provide evidence on how management earnings forecast disclosure differs between the United States (U.S.) and Canada, two otherwise similar business environments with different legal regimes. Canadian securities laws and judicial interpretations create a far less litigious environment than exists in the U.S. We find a greater frequency of management earnings forecast disclosure in Canada relative to the U.S. Further, although U.S. managers are relatively more likely to issue forecasts during interim periods in which earnings decrease, Canadian managers do not exhibit that tendency. Instead, Canadian managers issue more forecasts when earnings are increasing, and their forecasts are of annual rather than interim earnings. Also consistent with a less litigious environment, Canadian managers issue more precise and longer-term forecasts. These findings hold after controlling for other determinants of management earnings forecast disclosure that might differ between the two countries—firm size, earnings volatility, information asymmetry, growth, capitalization rates, and membership in high-technology and regulated industries.

Management earnings forecasts and IPO performance: evidence of a regime change

“…This regime change provides an opportunity for policymakers to observe the reaction of the market and for researchers to explore whether firms signal their own quality through earnings forecasts. In addition, the findings have major implications on how financial markets create managerial incentives to reduce forecast errors and to avoid costs associated with potential legal actions by shareholders when reported earnings diverge considerably from earnings forecasts (e.g., Skinner 1994;Frankel et al 1995;Teoh et al 1998b;Frankel et al 2002;Baginski et al 2002;Karamanou and Vafeas 2005;Jaggi et al 2006;Shen et al 2014).…”

Informational Uniqueness, Corporate Disclosure, and Information Environment

“…Prior empirical literature has used the frequency of management forecasts as one of the common proxies for voluntary disclosure (e.g. Kasznik 1999, Baginski et al 2002, Ball et al 2012, Li and Yang 2015. On the other hand, Rogers and Van Buskirk (2013) shows that firms are increasingly bundling their management forecasts with earnings announcements over time.…”

Automatic Prediction of Future Business Conditions

“…For these reasons, earning calls, and company filings more generally, have been the subject of inquiry by a rapidly growing literature seeking to extract forwardlooking statements. The goal is to help business analysts and policy makers to more accurately forecast firm's future behavior and performance [7][8][9][10].…”