Voluntary disclosures: Benefits and costs analysis

Some firms voluntarily release earnings forecasts prior to the related mandatory disclosures. Economic rationality dictates that managers would disclose those earnings forecasts if it is in their own best interests. While it is likely that conveying good news generates positive net value to managers, it is less obvious why providing “bad news” earnings forecasts leaves a manager better off. This dissertation identifies various firms' economic characteristics that would increase the net value of managers releasing “bad news” earnings forecasts. Each of these characteristics, if present, will have different implications on the firms' reported earnings, returns to shareholders and revisions of analysts' forecasts.; Using a matched pair design adapted from Kasznik and Lev (1995), a firm that provides “bad news” earnings forecast is matched with a firm that did not release any forecast when faced with (a similar) negative earnings surprise. The matching criteria are the percentage analysts' forecast error and firm size.; From a sample of 1096 firm-observations from 1992 to 1999, results indicate that managers are more likely to provide “bad news” earnings forecasts when faced with higher litigation costs, higher reputation costs and higher market alignment costs. In addition to the firms' characteristics, this dissertation also finds that managers are more likely to release “bad news” earnings forecasts when faced with lower costs on their personal wealth. Finally, combining the firms' characteristics and the level of insider sales (prior to the release of the forecasts) in a unified logistic regression model, litigation costs and insider sales are found to be the key factors that cause managers to release “bad news” earnings forecasts.