The Effects of Management Earnings Forecast Mandates: Evidence from China

Abstract:     

We examine the effects of forecast regulation in China, which mandates management earnings forecasts using bright-line earnings thresholds and allows voluntary forecasts in other circumstances. The high forecast rate that we observe from firms whose earnings fall in the mandatory regions indicates that the mandate has had the desired direct effect of expediting the arrival of material information. We focus on two indirect effects of the mandate. First, the mandate may stimulate voluntary forecasts because managers gain familiarity with internally developing and publicly releasing forecasts after forced forecast experience (FFE). We find that FFE in a given year is positively associated with the likelihood and timeliness of voluntary forecast in the subsequent year. Second, the mandate may induce earnings management around the mandatory-forecast thresholds. We find an abnormally large number of firms reporting earnings decreases just shy of the mandatory-forecast threshold. Our evidence suggests that a bright-line forecast mandate is a double-edged sword with benefits and costs.

Number of Pages in PDF File: 50

Keywords: management earnings forecast, forecast mandate, voluntary disclosure, China