Corporate Governance and Disclosure: The Effect of Institutional Investors and Outside Directors on the Properties of Management's Earnings Forecasts

Bipin Ajinkya
University of Florida

Sanjeev Bhojraj
Cornell University

Partha Sengupta
University of Maryland

Abstract: This paper investigates the effect of institutional ownership and board of directors’ composition on the properties of management earnings forecasts. A firm’s optimal disclosure policy is determined by a trade-off between costs and benefits of disclosure. Managers acting in their self-interest may have incentives to distort disclosure policy. Governance mechanisms, to the extent they are effective and protecting the interests of the providers of capital, should mitigate these distortions. We find evidence that institutional ownership and outside directors have a positive effect on the properties of earnings forecasts. Firms with greater institutional ownership and outside directorship are more likely to issue a forecast and consistently do so. Further, these forecasts are likely to be more specific and accurate. These governance measures also mitigate managers’ tendency to issue optimistic forecasts.

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