Disclosure Practices, Enforcement of Accounting Standards and Analysts' Forecast Accuracy: An International Study

It is found that firm-level disclosures are positively related to forecast accuracy, suggesting that such disclosures provide useful information to analysts, and a comprehensive measure of enforcement is constructed that strong enforcement is associated with higher forecast accuracy.

Abstract

Using a sample from 22 countries, I investigate the relations between the accuracy of analysts' earnings forecasts and the level of annual report disclosure; and between forecast accuracy and the degree of enforcement of accounting standards. I document that firm-level disclosures are positively related to forecast accuracy, suggesting that such disclosures provide useful information to analysts. I construct a comprehensive measure of enforcement and find that strong enforcement is associated with higher forecast accuracy. This finding is consistent with the hypothesis that enforcement encourages managers to follow prescribed accounting rules, which, in turn, reduces analysts' uncertainty about future earnings. I also find evidence consistent with disclosures being more important when analyst following is low and with enforcement being more important when more choice among accounting methods is allowed.