The effects of a mixed approach toward management earnings forecasts: Evidence from China

Xiaobei Huang, Xi Li, Senyo Tse and Jennifer Wu Tucker

Journal of Business Finance & Accounting, 2018, vol. 45, issue 3-4, 319-351

Abstract: Chinese regulators mandate management earnings forecasts when managers’ earnings expectations meet bright†line thresholds and allow voluntary forecasts in other circumstances. We examine the effects of this mixed approach. We find that Chinese mandatory forecasts have significant information content. Moreover, we observe a learning effect: mandatory forecasts appear to stimulate voluntary forecasts in subsequent periods as managers become familiar with the forecasting and disclosing procedures through forced experience. We find one negative consequence of the mixed approach, however: managers appear to manipulate earnings to avoid the forecast threshold of large earnings decreases. Overall, we document the pros and cons of a mixed approach toward management earnings forecasts in a major emerging market.

Date: 2018
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