CHEN, ZHIHONG, HSU, CHARLES and Zhu, Ruichao. "How does Product Market Competition Affect Disclosure of Management Forecasts? Journal of  Accounting and Economics, Forthcoming.

Abstract

Prior research investigates the relation between product market competition and management forecast decisions under the proprietary cost framework. We reexamine this relation through information demand and uncertainty channels, using Chinese imports as a largely exogenous measure of competition. We hypothesize that competition alters the intertemporal nature of management forecasts by raising investor and analyst demand for information about firms’ performance, especially short-term performance, while making it more difficult for managers to provide accurate long-horizon forecasts. Consistent with our predictions, competition increases the issuance of short-horizon forecasts, particularly for firms with greater information demand or higher uncertainty. Conversely, competition decreases the issuance of long-horizon forecasts, with this effect attenuated by information demand but amplified by uncertainty. Additional analyses indicate that our results are inconsistent with alternative explanations based on proprietary costs, outsourcing to China, expectation management, or bad-news hoarding. Our study offers new insights into how competition influences management forecast decisions.