Voluntary Disclosures and Analysts' Forecast Accuracy

ABSTRACTFor the past 20 years accounting regulatory bodies have recommended companies experiment with disclosing proprietary information that explains their investment potential to investors. Underlying this request for more transparency is the presumption that increased disclosure improves investor decision making. Using analysts' forecast accuracy as a proxy for investor decision making, this study examines whether increased voluntary disclosure improves investors' decision making. The results provide support for regulators' recommendation of increased voluntary disclosure. Furthermore, the US cross-listed firms examined provide more voluntary disclosures than the UK cross-listed firms examined; however voluntary disclosure provided by the firms does not explain variation in analysts' forecast accuracy. Regulators must include specific guidelines as to the type and precision of voluntary disclosures needed to enhance investors' decision making.(ProQuest: ... denotes formulae omitted.)INTRODUCTIONFor many years accounting regulators have discussed the need for an improved business reporting model to improve investors' decision making. The most recent development in the effort to improve the business reporting model and investors' decision making is the establishment of the World Intellectual Capital Initiative (WICI). The WICI framework is based on an extensible Business Reporting Language (XBRL) taxonomy and purports that certain voluntary disclosures, e.g. industry-specific and forward-looking disclosures, improve investors' decision making (Bray 2011). Despite the calls for increased voluntary disclosure firms have been slow to voluntarily provide the disclosures advocated by the WICI framework and its predecessors. To alleviate firms' reluctance to disclose more information voluntarily, more emphasis must be directed at explaining the link between increased voluntary disclosure and firm benefits such as increased analysts' following, a lower cost of capital and improved analysts' forecasts. This study examines whether increased voluntary disclosure is related to increased analysts' forecast accuracy and better decision making.LITERATURE REVIEWVoluntary disclosure theories surmise that the equilibrium level of voluntary disclosure is jointly determined by a firm's objectives and users' information needs (Langberg and Sivaramakrishnan 2008, Verrecchia 1990, 1983). Lang and Sivaramakrishnan (2008) propose an equilibrium model where managers voluntarily disclose unfavorable information only if it is sufficiently precise, but disclose favorable news with lower levels of precision. They conclude that firms disclose favorable information with lesser detail to maximum users' interpretation of the favorable information, whereas with unfavorable information firms want to steer users' interpretation of the unfavorable information by disclosing unfavorable information more precisely.Einhorn (2005) posits that a firm's voluntary disclosure strategy is a function of its mandatory disclosure environment. For example, firms domiciled in strict mandatory disclosure environments will disclose more information voluntarily to supplement the mandatory disclosures and to mitigate misinterpretations and inferences drawn from the mandatory disclosures.Empirical studies provide marginal support for the aforementioned voluntary disclosure theories. Gaurav (2005) for example, tests Einhom's theory that firms from strict mandatory disclosure environments disclose more information voluntarily and examines the voluntary disclosures of US-listed Asian companies and finds that these firms disclose fewer voluntary disclosures than predicted by Einhorn (2005). Gaurav (2005) may not support Einhorn (2005) because of the culture of secrecy underlying the mandatory disclosure environment of the US-listed Asian companies. This study attempts to control for the effect of a firm's mandatory disclosure environment and culture on a firm's voluntary disclosure strategy and examines US and UK cross-listed firms to test whether voluntary disclosure is related to analysts' forecast accuracy. …