Informational Endowment, Sophisticated Skepticism and Management Earnings Forecasts

56 Pages Posted: 7 Jun 2019

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

Mark Penno

University of Iowa - Henry B. Tippie College of Business

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business

Date Written: April 25, 2019

Abstract

While sophisticated skepticism promotes voluntary disclosure, various frictions serve to defeat it. One of the simplest frictions is rational investor uncertainty about management’s endowment of information (UEI). Sophisticated skepticism will increase as the likelihood that management is withholding value-relevant negative information increases, causing managers to voluntarily disclose increasingly unfavorable information in order to avoid the investors’ larger discounts. Based on previous research, we argue that the quality of management’s information improves with customer concentration. Accordingly, we find that the precision of, and investors’ reactions to, management forecasts increase for suppliers with more concentrated customer bases. Moreover, as the UEI model implies, firms with major customers are more likely to issue management forecasts preceding sales contractions (bad news) and the difference between the forecast disclosure frequency preceding sales expansions versus sales contractions decreases with both customer concentration and value relevance of the information possessed by management.

Keywords: Voluntary disclosure, Management forecasts, Uncertain endowment of information, Value relevance, Customer concentration

JEL Classification: M41, D82, D83, G20

Suggested Citation

Collins, Daniel W. and Penno, Mark C. and Zhang, Suning, Informational Endowment, Sophisticated Skepticism and Management Earnings Forecasts (April 25, 2019). Available at SSRN: https://ssrn.com/abstract=3392630 or http://dx.doi.org/10.2139/ssrn.3392630

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Mark C. Penno (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Suning Zhang

Iowa State University - Debbie and Jerry Ivy College of Business ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

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