Strategic Disclosure Model for Insider’s Financial Forecast Information

This study develops a theoretical model in which the voluntary disclosure of earnings forecast is a double-edged sword. Such disclosure may reduce the information asymmetry between investors and firms but simultaneously allows entrepreneurs create hype. Beginning from 2005 the disclosures of financial forecasts for Taiwanese public companies have not been mandatory, with firms being able to decide whether they wish to disclose such forecasts or not. This study devises a theoretical model for the disclosure decision, in which insider may manipulate information and investors can learn with bounded rationality. The analysis presented in this study demonstrates that a company may forgo earnings forecast disclosure. Considering forecast error costs in a multiperiod model, if the entrepreneur decides to voluntarily disclose financial forecasts, he should reduce the degree of manipulation. Additionally, the inferences of our model are examined based on forecasts issued by Taiwanese-listed firms. This study identifies a positive relationship between profit from insider trading and manipulation of earnings forecasts. Furthermore, the forecast error of voluntary disclosure may negatively impact firm value.