The joint impact of commitment to disclosure and prior forecast accuracy on managers' forecasting credibility

Although managers rate concerns about being seen as committed disclosers as an important consideration in their voluntary disclosure decisions, prior research has paid limited attention to how investors view commitment to disclosure. This study experimentally tests two competing perspectives relating to how managers' commitment to disclosure and prior forecast accuracy jointly influence managers' forecasting credibility. The first perspective (the normative perspective) draws on economic theory and the second perspective (the omission bias perspective) draws on theory from psychology. The normative perspective suggests that commitment to disclosure and prior forecast accuracy will independently influence managers' forecasting credibility. In contrast, the omission bias literature suggests that the influence of commitment to disclosure on managers' forecasting credibility depends on managers' prior forecast accuracy. In other words, the normative perspective suggests two main effects, whereas the omission bias perspective suggests a commitment to disclosure x accuracy interaction. To test the competing predictions relating to the joint impact of commitment to disclosure and prior forecast accuracy on managers' forecasting credibility, I conduct an experiment. Results of this experiment support the omission bias perspective. Participants in the role of investors rate more (less) committed managers as more (less) credible, but only when they are also accurate. When managers are inaccurate, however, this relationship reverses. That is, more committed managers are viewed as less credible relative to their less committed peers. These results suggest that managers' concerns about commitment to disclosure are indeed valid, but only when they are accurate. When managers are less accurate, commitment to disclosure hurts, rather than helps, managers' credibility. Participants' valuation judgments as well as their judgments relating to a current disclosure are positively associated with their judgments of managers' forecasting credibility, suggesting that their assessment of managers' credibility may have significant valuation consequences. This study contributes to the voluntary disclosure literature and has implications for managers who provide earnings forecasts and for investors who use these forecasts in their investment decisions.