International Diversification and Forecast Optimism: The Effects of Reg FD

33 Pages Posted: 10 Dec 2007 Last revised: 15 Dec 2011

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Don Herrmann

Oklahoma State University - Stillwater - School of Accounting

Wayne B. Thomas

University of Oklahoma

Date Written: December 7, 2007

Abstract

Research shows that analysts following companies with a higher portion of foreign operations provide more optimistic forecasts, presumably in order to maintain favorable relations with management and thereby obtain improved access to information. We examine the effect of the introduction of Regulation Fair Disclosure (Reg FD) on analyst forecast bias for internationally diversified firms. We hypothesize that analysts' incentives to issue optimistic forecasts for such firms should be reduced in the post-Reg FD era, because Reg FD prohibits firms from selectively disclosing management information to analysts. First, we demonstrate that average forecast bias decreases for our full sample of multinational firms. Second, we show that the positive relation between forecast optimism and international diversification significantly declines (and even disappears) in the post-Reg FD period. Reg FD appears to have been successful in reducing analysts' optimistic bias and in reducing the effect of forecasting complexity on forecast bias for our sample of multinational firms.

Keywords: Analysts, forecast bias, Reg FD, international diversification

JEL Classification: M41, F20, G29, G38, F23

Suggested Citation

Hope, Ole-Kristian and Herrmann, Don and Thomas, Wayne B., International Diversification and Forecast Optimism: The Effects of Reg FD (December 7, 2007). Accounting Horizons, Vol. 22, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=1067601

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Don Herrmann

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
345 Business Building
Stillwater, OK 74078
United States

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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