Mandatory vs. Voluntary Management Earnings Forecasts in China
March 5, 2013 Leave a comment
Mandatory vs. Voluntary Management Earnings Forecasts in China
Xiaobei Huang University of International Business and Economics – Business School
Xi Li Temple University – Fox School of Business and Management
Senyo Y. Tse Texas A&M University – Lowry Mays College & Graduate School of Business
Jenny Wu Tucker University of Florida – Warrington College of Business Administration
January 14, 2013
Mays Business School Research Paper No. 2012-82
Abstract:
Capital-market regulators face the question of whether a forecast mandate would improve the information environment or be counterproductive if managers are unable or unwilling to provide reliable forward-looking information. We examine the efficacy of forecast regulation in the emerging market of China, which mandates management earnings forecasts in certain performance regions such as anticipated losses, turning profits, or large changes in earnings from the previous year and allows voluntary forecasts in other circumstances. We examine the quantity, quality, and usefulness of mandatory forecasts by comparing managerial behavior under the mandatory vs. voluntary regime within China. We gain further insight by examining forecast behavior in the US, where forecasts are voluntary, in performance regions similar to those defined by the Chinese mandate. Our results suggest that the Chinese mandate substantially increases the quantity of information available to investors, particularly by state-owned enterprises (SOE) – firms that play a major role in the economy but are reluctant to provide forecasts voluntarily. After issuing mandatory forecasts, firms are more likely to issue voluntary forecasts in the subsequent year. Mandatory forecasts are less timely and less precise than voluntary forecasts, but the evidence on forecast accuracy is inconclusive. Investors react to mandatory forecasts as if they are useful. One unintended consequence of the Chinese mandate is that firms appear to manage their reported earnings to avoid the bright-line threshold for mandatory forecasts of large earnings decreases. Overall, our evidence provides feedback to regulators in developed economies and guidance to regulators in emerging markets.
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