The Disclose or Abstain Incentive to Issue Management Guidance

48 Pages Posted: 18 May 2014 Last revised: 5 Mar 2018

See all articles by Edward Xuejun Li

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy

Charles E. Wasley

Simon School, University of Rochester

Jerold L. Zimmerman

University of Rochester - Simon Business School

Date Written: September 8, 2014

Abstract

Prior research generally argues that managers issue management earnings forecasts (MFs) to secure capital market benefits (i.e., reduce information asymmetry between managers and investors to lower a firm’s cost of capital), to reduce the firm’s litigation costs, or to allow managers to trade opportunistically in their firm’s stock. We discuss and test whether some MFs are issued because managers have an affirmative duty under Rule 10b-5 of the Securities Acts to disclose all material information or to abstain from trading in their firm’s securities. Four sets of tests support our conjecture that managers issue some MFs to comply with their duty under Rule 10b-5. Since prior MF studies have typically ignored the alternative explanation that managers issue some MFs to comply with disclose or abstain obligations the inferences drawn from such studies about managerial incentives to issue MFs likely overstate the economic significance of the variables used to capture capital market or opportunistic incentives for MF disclosure.

Keywords: Management forecasts, guidance, insider trading, Rule 10b-5

JEL Classification: G18, K22, M41, M40

Suggested Citation

Li, Edward Xuejun and Wasley, Charles E. and Zimmerman, Jerold L., The Disclose or Abstain Incentive to Issue Management Guidance (September 8, 2014). Journal of Law, Finance & Accounting, Vol. 1, Iss. 1, pp.. 187-233, 2016. Available at SSRN: https://ssrn.com/abstract=2437970 or http://dx.doi.org/10.2139/ssrn.2437970

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3235 (Phone)

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

Jerold L. Zimmerman (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
330
Abstract Views
1,864
rank
91,651
PlumX Metrics