Credibility of Managerial Forecast Disclosure - Game Theory and Regulative Implications

Managerial forecast disclosure has gained increasing interest. Besides voluntary publication, managers are more and more obliged to disclose forecasts by recent accounting regulation. This acknowledges the common proposition that forecasts were exceptionally relevant and decision useful information for investors. But it neglects the problems of credibility arising from the non-verifiable nature of forecasts. My paper analytically investigates the credibility of managerial forecast disclosure introducing a game theoretic perspective by extracting robust implications from disclosure models. The analysis is two-fold, aiming first at a non-regulated environment and second at an environment with audit or liability systems. The results are alarming: Without enforcement, forecast credibility is linked to very restrictive conditions. In particular, unfavourable forecasts, e.g. going concern uncertainties, will be withheld. Different audit and litigation systems may increase or may lessen, but not eliminate the deficits. Upon the results of my analysis, I derive general regulative implications on enforcement mechanisms, managerial information endowment, and disclosure. These may assist but cannot assure the credibility of managerial forecast disclosure. In conclusion, whatever regulatory steps are taken, the value of forecast publication currently discussed in the context of voluntary prospective value reporting and mandatory risk reporting appears to be overestimated.