Corporate governance and management earnings forecast behaviour: Evidence from a low private litigation environment

Abstract

Purpose

The purpose of our study is to examine the influence of three external corporate governance mechanisms (continuous disclosure regulatory reform, analyst following and ownership concentration) and one internal corporate governance mechanism (board structure) on the likelihood, frequency, horizon, precision and accuracy of management earnings forecasts in the low private litigation environment of New Zealand.

Design/methodology/approach

The authors use a sample of 1,082 management earnings forecasts issued by 125 firms listed on the New Zealand Exchange during the 1998-2007 financial reporting periods. The authors effectively control the self-selection bias problem inherent in management earnings forecasts.

Findings

The findings provide strong evidence that corporate governance significantly influences management earnings forecast behaviour. Firms with effective corporate governance tend to forecast earnings and provide these earnings forecasts more frequently and precisely. Earnings forecasts issued by firms with more non-executive directors on the board are less optimistically biased. A possible interpretation of the findings is that effective corporate governance mechanisms are able to substitute for a private enforcement alternative.

Originality/value

The findings have value in informing governance choices in the absence of external disciplinary mechanisms such as private litigation.

Citation

Chapple, L., Dunstan, K. and Truong, T.P. (2018), "Corporate governance and management earnings forecast behaviour: Evidence from a low private litigation environment", Pacific Accounting Review, Vol. 30 No. 2, pp. 222-242. https://doi.org/10.1108/PAR-09-2016-0081