Peer effects in management forecast precision decision: evidence from a novel text-based network

ABSTRACT

This paper examines the peer effects in strategic disclosure decisions. We exploit the heterogeneous and intransitive nature of peer networks by mapping out peers using MD&A textual comparability to identify such effects. Using recent developed spatial econometric techniques, we find a strong positive peer effect in the forecast precision decisions, which is consistent with social learning assumption. After mitigating the endogenous problems with two instrumental variables and excluding the geographic factors, our conclusion is still valid. Overall, our result shed light on the role of peer effects in the formation of voluntary disclosure.

KEYWORDS:

• Text-based network
• peer effects
• management forecast precision
• voluntary disclosure

JEL CLASSIFICATION:

• D81
• G14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13504851.2022.2078772

Notes

¹ Management’s Discussion and Analysis (MD&A) is a required disclosure for publicly traded firms with their annual filings that must cover certain topics. It is intended as a way for managers to provide their perspectives to investors regarding the firm’s business, financial conditions, material risks, as well as management’s future projections.

² Once the decision to issue a forecast is made, managers can issue either qualitative or quantitative forecasts. Quantitative forecasts can be made as point, range, minimum, or maximum estimates. For range forecasts, managers can further choose their width.

³ In the Dynasty Financial Partners’ 2021 Investment Forum, Howard Marks, Co-chairman of Oaktree Capital Management, mentions that: ‘Innovation and technical adoption are happening at a much more rapid pace than ever before … as developing and scaling new products is much easier in the digital world, it’s never been more possible for companies to develop completely new avenues of growth’ For full memo please access: https://www.oaktreecapital.com/docs/default-source/memos/something-of-value.pdf?sfvrsn=b0d46166_8

⁴ In our sample, the ratio of point and range estimates in all management forecasts is 92.75%, which is consistent with the statistics (80%+) of Cheng, Luo, and Yue (2013). Therefore, in this paper, we regard the other two types of MEFs, open interval and pure text expression, as the borderless forecasts.