The Disclose or Abstain Incentive to Issue Management Guidance

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