The influence of corporate governance on management earnings forecast
Date of this Version
We examine the influence of three important external corporate governance
mechanisms – continuous disclosure regulatory reform, analyst following and
ownership concentration and one important internal corporate governance mechanism – board structure on the likelihood, frequency, horizon, precision and accuracy of management earnings forecasts in the low private litigation environment of New Zealand. Based on a sample of 1,082 management earnings forecasts issued by 125 firms listed on the New Zealand Exchange during the 1998-2007 financial reporting periods, we provide strong evidence that these four corporate governance mechanisms have a significant influence on management earnings forecast behaviour after effectively controlling for endogeneity, multicollinearity and self-selection bias problems. Specifically, firms monitored by effective corporate governance mechanisms were more inclined to pre-empt their earnings announcements with earnings forecasts
(overall, non-routine and quantitative) and provide these earnings forecasts more frequently. These earnings forecasts issued by these firms were less optimistically biased. In addition, firms having more directors with accounting expertise on their boards and audit committees were more likely to provide earnings forecasts with longer horizon and smaller forecast error. Board size and the existence of a formally established audit committee are shown to have a positive impact on forecast error. A possible interpretation of our findings is that effective corporate governance mechanisms are able to be more beneficial in monitoring corporate behaviour in circumstances where private enforcement is a less viable alternative. Our findings should have important implications for the other low private litigation environments and
thus contribute to the debate regarding the value of corporate governance
internationally. These findings may also have important implications for other high private litigation environments such as the United States given the high economic and social costs that have been identified as being related to private litigation.
This document has been peer reviewed.