The Effect of Voluntary Disclosure on Firm Risk and Firm Value: Evidence from Management Earnings Forecasts

41 Pages Posted: 12 Jan 2013

See all articles by Stephen R. Foerster

Stephen R. Foerster

University of Western Ontario - Richard Ivey School of Business

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business

Yaqi Shi

University of Western Ontario - Richard Ivey School of Business

Date Written: January 14, 2013

Abstract

This study investigates whether the voluntary disclosure of management earnings forecasts influences investors’ assessment of firm risk and firm value. We find a significant negative relationship between the issuance of management earnings forecasts and a variety of measures of firm risk (idiosyncratic risk, stock return volatility, beta, and bid-ask spreads), with more frequent, more precise and more accurate earnings forecasts further decreasing firm risk. Our results therefore suggest that information quality is an important determinant of both diversifiable risk and nondiversifiable systematic risk. We also demonstrate that management earnings forecasts are positively associated with firm value as captured by Tobin’s Q while more frequent, precise and accurate forecasts further enhance valuation premiums. Finally, we find that management earnings forecasts impact firm value not only through a reduction in firm risk, but also through changing investors' perceptions about future cash flows. Our results are robust to various sensitivity checks. Overall, releasing high-quality management earnings forecasts is associated with important capital market benefits.

Keywords: management earnings forecasts, voluntary disclosure, firm risk, firm value, information quality

JEL Classification: G12, G14, G32, G34, M41

Suggested Citation

Foerster, Stephen R. and Sapp, Stephen G. and Shi, Yaqi, The Effect of Voluntary Disclosure on Firm Risk and Firm Value: Evidence from Management Earnings Forecasts (January 14, 2013). CAAA Annual Conference 2013. Available at SSRN: https://ssrn.com/abstract=2199587 or http://dx.doi.org/10.2139/ssrn.2199587

Stephen R. Foerster

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada
519-661-3726 (Phone)
519-661-3485 (Fax)

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
519-661-3006 (Phone)
519-661-3959 (Fax)

Yaqi Shi (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
(519) 661 4097 (Phone)

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