Refer to Theory in Practice 12.2 concerning Mark's Work Wearhouse, Ltd. As noted there, Mark's did not publish an earnings forecast for 1992, a year for which it was expecting a loss.

Required

Suggest two possible reasons why the disclosure principle failed with respect to Mark's 1992 forecast.

Theory in Practice 12.2

The impact of bad news can be seen in the case of Mark's Work Wearhouse, Ltd., a large Canadian clothing retailer. For many years, Mark's included a high-quality forecast of next year's earnings in its MD&A. However, Mark's did not release a forecast for 1992, a year in which it was expecting a loss. The reason, presumably, was that if Mark's released the bad-news forecast, its high quality would greatly affect investors' expectations of the firm's future prospects, thereby overcoming a favourable influence of the high quality forecast itself on its cost of capital. Why should a firm voluntarily release a high quality forecast of trouble ahead? Consequently, high-quality disclosures will tend to be for good news.