In our paper, Bias and Efficiency: A Comparison of Analyst Forecasts and Management Forecasts, we compare the forecast characteristics of analyst forecasts and management forecasts. Frequently, analysts and managers provide similar type of information to investors, namely forecasts. Since managers and analysts have different incentives and different information sets, we empirically test whether those differences are manifested in their forecast characteristics. Specifically, we compare the bias, a systematic deviation of management and analyst EPS forecasts from the actual realized EPS, and efficiency, the ability of managers and analysts to incorporate prior publicly available information in their forecasts.

When comparing management forecasts and analyst forecasts, it is important to consider the implications of the difference in incentives and information available to analysts and managers. Since prior literature documents an optimistic bias in analyst forecasts, we expect that, given management incentives and cognitive biases, management forecasts will be at least as biased as analyst forecasts. In addition, since companies’ managers are exposed to private information, we expect management forecasts to better incorporate prior available information.

We find several striking results. First, we find that prior stock returns do not predict management forecast errors while they predict analyst forecast errors. Furthermore, while we find an optimistic bias in a broad sample of both management forecasts and analyst forecasts, the optimistic bias in analyst forecasts disappears in months in which management forecasts are issued. The bias is still apparent for these firms when managers do not provide forecasts.

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In the paper, Mandatory Financial Reporting Environment and Voluntary Disclosure: Evidence from Mandatory IFRS Adoption, which was recently made publicly available on SSRN, we investigate the interaction between mandatory financial reporting environment and voluntary disclosure by employing the mandatory adoption of International Financial Reporting Standards (IFRS) in 2005 as an exogenous increase to mandatory reporting to examine changes in firms’ voluntary disclosure practices. To measure voluntary disclosure, we focus on a discretionary action, namely the extent to which managers provide earnings forecasts, the most prominent performance measure that a firm supplies to investors. Ex-ante, it is unclear how the increase in reporting quality following the mandatory adoption of IFRS could influence management forecasts. On the one hand, mandatory financial reporting and voluntary disclosure can be complements, wherein the former produces verifiable information that improves the credibility of the latter and therefore encourages managers to issue more forecasts, i.e. the confirmatory role of mandatory reporting.

Prior studies document improved reporting quality following IFRS adoption, evidenced by earnings with lower manipulation and higher value relevance, timeliness, and information content. Therefore, given the evidence that IFRS improves the verifiability of earnings, the complementary view suggests that the mandatory adoption of IFRS should increase management forecasts. On the other hand, mandatory financial reporting and voluntary disclosure could also be substitutes, as private information that was previously conveyed through voluntary disclosure is now directly reflected in mandatory financial reports. Since IFRS produces more timely and value-relevant earnings numbers, the substitution effect predicts that the increased quality of financial reporting may reduce the demand for supplementary information from investors to predict future earnings. Therefore, IFRS adoption may also lead to fewer management forecasts.

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In the paper, Capital Market Consequences of Managers’ Voluntary Disclosure Styles, which is forthcoming in the Journal of Accounting and Economics, I examine the capital market consequences of managers establishing an individual disclosure style. While both neoclassical economic and agency theories suggest that managers’ individual preferences should not have an effect on corporate outcomes, several recent academic studies find that managers have styles of their own that they carry from one firm to the other. Anecdotal evidence also suggests that manager credibility matters to financial analysts, who penalize CEOs and CFOs that fail to effectively manage expectations. To the extent that these manager-specific “styles” affect investors’ perceptions of the manager’s overall reputation and credibility, investors should take this into consideration when responding to managers’ disclosure decisions.

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In July 2005, the Securities and Exchange Commission (SEC) announced the enactment of the Securities Offering Reform (Reform), which, among other things, relaxes restrictions—known as ‘gun jumping’ provisions—on firms’ forward-looking disclosures prior to public equity offerings. The SEC argues that in recent years, the information environment has become much richer through marked improvements in mandated disclosure quality and both broader and timelier dissemination of information, rendering gun jumping provisions “unnecessary and outdated,” as these rules restrict valuable information flow to investors around a highly important corporate event (SEC [2005]). However, opponents of the Reform argue that the restrictions are meant to protect investors from managers conditioning the market (i.e., hyping the stock price) before incentive-rich corporate events such as equity offerings, and the relaxation of these restrictions will increase market conditioning.

In our paper, The Changing Information Environment and Disclosure De-regulation: Evidence from the 2005 Securities Offering Reform, which was recently made publicly available on SSRN, we examine the impact of the Reform on management forecasting behavior before equity offerings. To provide a broader context in which to evaluate this impact, we also investigate the effect of the recently improved information environment on market conditioning. Thus, this paper is comprised of three main analyses. First, using the enactment of SOX in 2002 as the shift in the information environment, we examine whether managers generally attempt to mislead the market using forecast announcements in the pre-SOX period. Using a difference in differences design, we find that there is a statistically significant increase in the propensity and magnitude of good news disclosures by SEO firms via management forecasts in the period before the SEO, as compared to those of non-SEO firms in the same industry and of similar size, growth, and performance. Moreover, we observe a negative association between the pre-SEO good news disclosure activity and long-term abnormal returns following the SEO. This suggests that in the less rich information environment pre-SOX, managers use forecast announcements to hype the stock price in the months prior to equity offerings.

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