Business Intelligence

Moral Hazard, Firms' Internal Governance And Management Earnings Forecasts

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Executive Summary

This paper investigates the role of management earnings forecasts in mitigating information asymmetry between investors and managers relating to moral hazard, and explains how earnings guidance can facilitate monitoring. It demonstrates that firms that are more susceptible to moral hazard problems and more difficult to monitor are also more likely to issue annual earnings forecasts and they do so more frequently. In addition, it examines how firm internal governance drives forecasting decisions and show that stronger board governance and managerial equity incentives are associated with higher likelihood and frequency of forecast issuance. Finally, this paper provides robust evidence that managerial equity incentives are associated with more informative and higher quality guidance.

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