Question: A number of firms such as BCE Inc Coca Cola

A number of firms, such as BCE Inc., Coca Cola, and McDonald’s, have discontinued their practice of issuing quarterly earnings forecasts, thereby lowering their disclosure quality. Often, a reason given is that the severe negative consequences of not meeting quarterly targets gives management a short- run focus, distracting it from the attainment of longer-term goals. Consequently, the firm is better off not to issue a forecast in the first place.
These and other possible reasons were examined by Chen, Matsumoto, and Rajgopal ( 2011), who identified a sample of firms that discontinued quarterly earnings guidance over the period 2000– 2006. They reported that firms that are losing long- term investors are relatively likely to discontinue quarterly forecasts. They also found that firms that stop forecasts tend to have poor share returns leading up to the stopping announcement, and past difficulty in meeting analyst earnings forecasts. These findings suggest another reason for discontinuing forecasts.

a. Use the disclosure principle to explain why management may issue quarterly earnings forecasts.
b. Outline some of the costs to firms of issuing quarterly earnings forecasts.
c. Chen, Matsumoto, and Rajgopal (2011) also found that stopping firms suffer an average negative share return during a short window around the date of the stopping announcement. Are these negative share returns consistent with the authors’ other findings described above? Why?
d. The stopping announcements suggest a failure of the disclosure principle. Use the models of Verrecchia (1983) and Dye (1985) to explain why firms may discontinue earnings forecasts.

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