Predisposed opportunities: incentives for earnings forecasts revision by management under the Japanese 'Timely Disclosure Rules'

This study investigates the incentives on revisions of management earnings forecasts in Japan, where the disclosure of forecasts is effectively mandatory in quarterly financial reporting, but their revisions are required only when a certain threshold is exceeded. Under this unique Japanese system, which is different from the US-style voluntary disclosure, we hypothesise that predisposed opportunities provided in each quarterly financial reporting will encourage management to make voluntary disclosures. Our analysis shows that earnings forecasts revisions by management are lower on the earnings announcement date than during the course of a quarterly period. Our results also suggest that slight revisions made on the earnings announcement date contribute to increasing the frequency of revisions. In addition, our evidence shows relatively small errors when forecasts have been revised by narrow margins. These findings imply that the Japanese 'Timely Disclosure Rule' promotes the disclosure of timely revisions of forecasts and has the effect of disciplining management to monitor profit prospects more accurately. Our findings are also consistent with the Japanese management belief that forecast information is important, and timely disclosures should be voluntary rather than required by regulation.