The Effect of Conditional Management Earnings Forecast Mandates on Voluntary Disclosure and Analyst Forecast Properties

This study examines the effect of a conditional management earnings forecast mandate on voluntary disclosure and the properties of analyst forecasts in China, where firms are required to provide earnings forecasts when they expect to either make a loss, turn from loss into profit, or experience a large change in earnings. We find that firms’ propensity to issue voluntary management earnings forecasts is higher when they anticipate the disclosure of mandatory management earnings forecasts in the future. This relation is stronger for government-controlled firms. We also find a significant improvement in the quality of analyst earnings forecasts (measured by forecast accuracy and dispersion) for firms that provide voluntary management earnings forecasts, while the disclosure of mandatory management earnings forecasts is negatively associated with analyst earnings forecast quality. We document that this differential effect on analyst earnings forecast quality is attributable to the higher quality of voluntary management earnings forecasts. Further analyses suggest that the positive effect of voluntary management earnings forecasts on analyst earnings forecast quality is larger for firms with a relatively weak existing information environment. Our findings suggest that the conditional mandatory disclosure of management earnings forecasts can incentivize managers to provide voluntary forecasts, and that these voluntary forecasts play a greater role than mandatory management forecasts in improving firms’ external information environment in the Chinese capital market.