The Effects of the Private Securities Litigation Reform Act and the Regulation Fair Disclosure on Management Earnings Forecasts

This research evaluates the effects of the Private Securities Litigation Reform Act and Regulation Fair Disclosure on the level of voluntary disclosure of management earnings forecasts in U.S. pharmaceutical and healthcare industry. It also investigates the impact of regulation changes on forecast intonation, forecast horizon and forecast type. Current analysis is based on 5908 firm- quarter observations and 628 forward-looking statements disclosed during 1992-2004. Two approaches are implemented: the first method is based on probit and ordered probit econometric model estimation; the second method employs statistical comparison of population proportions with independent samples. The obtained results suggest that the amount of earnings forecasts did not experience any changes following the Private Securities Litigation Reform Act passage, but considerably increased after Regulation Fair Disclosure. It is also established that the Private Securities Litigation Reform Act caused overall forecast intonation to become more pessimistic, whereas Regulation Fair Disclosure reversed the effect in favour of optimistic forward-looking statements. Moreover, it is evident that after the Private Securities Litigation Reform Act the time span of projections extended. Finally, it was found that post the Private Securities Litigation Reform Act forecast form choice aspired most precise, i.e. point form. Regulation Fair Disclosure slightly changed this outcome by making range forecasts prevalent.