A framework to analyze management's voluntary forecast disclosure decisions

The purpose of this dissertation is to develop an empirical framework which can be used to analyze management's voluntary forecast disclosure decisions. In the first part of this dissertation, a cogent theory of incentives for voluntary disclosure of management forecasts is developed and empirically tested. The results show that both good and bad news forecast firms are larger in size (more information available to investors), have higher percentage of executive stock ownership (manager's self-interest/personal welfare stake in disclosure decisions) and have higher reporting frequency (management's policy of voluntary disclosure of additional information to the market). For the good news firms, the signaling good news motivation appears to dominate. For the bad news firms, the signaling incentive is insignificant, while analysts' forecast variability (amount of information asymmetry across investors), forecast error correction and earnings variability (forecast accuracy) motivations are significant.In the second part of this dissertation, the effects of incentives for voluntary disclosure that are manifested in security market behavior are measured. Previous standard event-type studies are subject to two problems--self-selection bias and assumption of a constant belief about the forecast event. The purpose of the second component is to develop a methodology to overcome these problems and to provide more dependable inferences regarding whether the management forecast issuance really conveys new information to the market. The results show that after incorporating management's decision rule/incentives to issue forecasts into the stock price reaction tests, a significantly less positive(negative) abnormal stock return is obtained for a good(bad) news forecast. The results show that cumulative abnormal returns at the management forecast disclosure date are significantly associated with the selection bias. The selection bias explains more of the stock return variation at the forecast date than the surprise component in the management forecast disclosure.An examination regarding management's motivation to issue bad news forecasts is conducted in the third part of this dissertation. Bad news forecasts are issued to correct analysts' forecasts and to prevent dramatic swings in stock price at the end of the period when actual earnings are announced. This reasoning is similar to the inoculation principle in the communications literature. The results support the inoculation principle as an explanation of why firms issue bad news forecasts.U of I OnlyETDs are only available to UIUC Users without author permissio