A major reason for the rarity of formal financial forecasts in annual reports is the possibility of lawsuits if the forecast is not met, particularly in the United States. On November 17, 1995, The Wall Street Journal reported that the SEC was supporting a bill before the U. S. Senate to provide protection from legal liability resulting from forecasts, providing that “meaningful cautionary statements” accompanied the forecast.
a. If firms are discouraged from providing financial forecasts by the prospect of litigation, how could this lead to a negative impact on the working of securities markets? Can you give an argument that a litigious environment might actually improve the working of securities markets?
b. Explain how the passage of a bill such as that mentioned above might benefit investors.
c. Explain how passage might benefit firms.