The Information Content of Management's Prospective Comments in Financially Distressed Companies: A Note

Abstract

Prior research revealed management's prospective comments (MPCs) in annual reports to be informative with respect to companies' future performance. As the finding was derived from analyses of random samples of companies, it is not known whether it is generalizable to companies that are experiencing financial distress. This study investigates whether disclosure of MPCs in the annual reports of companies experiencing financial distress is informative with regard to their future viability. The MPCs of 140 Australian public companies that had experienced significant losses were identified and then categorized as optimistic, pessimistic, mixed or no MPCs. Results from logistic regression analysis indicate that such MPCs provided information incremental to that contained in historical financial information about companies' future viability. It was also found that, while companies that did not disclose any MPCs were more likely to fail than companies that disclosed optimistic MPCs, they were as likely to fail as companies that disclosed pessimistic or mixed MPCs. This suggests that financially distressed companies avoid disclosing MPCs in the absence of an optimistic outlook, a finding that supports Darrough and Stoughton's (1990) theory of selective disclosure.

Keywords: annual reports, disclosure, inadequate disclosure, information, management's prospective comments

JEL Classification: M41, M45