Abstract:
Under mandatory disclosure requirements, firms tend to issue overly conservative or vague earnings forecasts in order to reduce the litigation risk arising from forecast deviations, which hinders the reduction of information asymmetry between firms and investors. Against this backdrop, whether the forward-looking information "safe harbor" system can induce firms to issue earnings forecasts with more informational content merits in-depth examination. Using a sample of A-share companies listed on the Shanghai and Shenzhen stock exchanges, this study finds that the forward-looking information "safe harbor" system, by lowering firms' litigation risk associated with misrepresentation, enhances both the optimism and the precision of mandatory earnings forecasts; this effect is more pronounced for firms situated in regions with a sounder legal environment, operating in more competitive industries, and receiving less analyst attention. The effect on the accuracy of mandatory earnings forecasts also has its boundaries: the improvement is more significant for asset-heavy industries with longer contract or order cycles, such as construction and fabricated metal products, as well as for firms with lower earnings volatility and higher internal control quality. Further analysis indicates that, by improving the precision of mandatory earnings forecasts, the forward-looking information "safe harbor" system significantly reduces stock price synchronicity, thereby enhancing the quality of mandatory earnings forecasts. This study provides new evidence on the policy effects of the forward-looking information "safe harbor" system, and offers guidance for further refining the capital market's information disclosure system under the registration-based IPO regime.
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