The Effect of Regulation FD on the Properties of Management Earnings Forecasts

Posted: 22 Aug 2015

See all articles by Frank Heflin

Frank Heflin

University of Georgia - J.M. Tull School of Accounting

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting

Inho Suk

State University of New York (SUNY) at Buffalo - School of Management

Date Written: 2012

Abstract

We investigate Regulation FD’s (FD) effect on management earnings forecast properties. We posit FD’s prohibition on private manager-analyst communication reduces (increases) optimism (pessimism) in management earnings forecasts. Prior to FD, managers could avoid publicly retracting prior optimistic forecasts by privately communicating with analysts, who could lower investor expectations with a new analyst forecast. After FD, managers with optimistic forecasts must either publicly admit their optimism by issuing a new management forecast or they must negatively surprise investors at the earnings announcement. Further, FD forces managers to use public forecasts instead of private communications to establish beatable expectations. Our evidence suggests FD reduced optimism in management forecasts. This reduction in optimistic bias is not offset by an increase in pessimistic bias. Consistent with this, we further find post-FD improvements in forecast accuracy and informativeness. We find no such changes around several potentially confounding events or for foreign firms surrounding FD. Overall, our evidence suggests FD improved firms’ forecast properties (less bias, greater accuracy, and greater informativeness).

Keywords: management earnings forecasts, capital markets, regulation, disclosure

JEL Classification: G10, G38, K22, M41

Suggested Citation

Heflin, Frank and Kross, William and Suk, Inho, The Effect of Regulation FD on the Properties of Management Earnings Forecasts (2012). Journal of Accounting and Public Policy, Vol. 31, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=2648473

Frank Heflin

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706-542-1616 (Phone)
706-542-3630 (Fax)

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting ( email )

Buffalo, NY 14260
United States

Inho Suk (Contact Author)

State University of New York (SUNY) at Buffalo - School of Management ( email )

342 Jacobs Management Center
Buffalo, NY 14260-4000
United States
716-645-3215 (Phone)

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