Journal of Law, Finance, and Accounting > Vol 1 > Issue 1

The Disclose or Abstain Incentive to Issue Management Guidance

Edward Li, Zicklin School of Business, Baruch College, USA, edward.li@baruch.cuny.edu Charles Wasley, Simon School of Business, University of Rochester, USA, charles.wasley@simon.rochester.edu Jerold Zimmerman, Zicklin School of Business, Baruch College, USA, jerry.zimmerman@simon.rochester.edu
 
Suggested Citation
Edward Li, Charles Wasley and Jerold Zimmerman (2016), "The Disclose or Abstain Incentive to Issue Management Guidance", Journal of Law, Finance, and Accounting: Vol. 1: No. 1, pp 187-233. http://dx.doi.org/10.1561/108.00000001

Published: 29 Apr 2016
© 2016 E. Li, C. Wasley, and J. Zimmerman
 
Subjects
Financial reporting,  Disclosure,  Financial markets,  Law,  Regulation
 
Keywords
Insider tradingGuidanceManagement forecastsRule 10B-5
 

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In this article:
1. Introduction
2. Literature Review
3. A Framework of Managers’ MF Disclosure Decisions
4. Data, Sample Selection, and Empirical Methods
5. Results
6. Limitations
7. Conclusions
References

Abstract

Prior research generally argues that managers issue management earnings forecasts (MFs) to secure capital market benefits (that is, to reduce information asymmetry between managers and investors to lower a firm’s cost of capital), to reduce the firm’s litigation costs, or to allow managers to trade opportunistically in their firm’s stock. We discuss and test whether some MFs are issued because managers have an affirmative duty under Rule 10b-5 of the Securities Acts to disclose all material information or to abstain from trading in their firm’s securities. Four sets of tests support our conjecture that managers issue some MFs to comply with their duty under Rule 10b-5. Since prior MF studies have typically ignored the alternative explanation that managers issue some MFs to comply with disclose or abstain obligations, the inferences drawn from such studies about managerial incentives to issue MFs likely overstate the economic significance of the variables used to capture capital market or opportunistic incentives for MF disclosure.

DOI:10.1561/108.00000001