The Association Between Outside Directors, Institutional Investors and The Properties of Management

DOI: 10.1111/j.1475-679X.2005.00174.
x
Journal of Accounting Research
Vol. 43 No. 3 June 2005
Printed in U.S.A.
The Association between Outside

Directors, Institutional Investors
and the Properties of Management
Earnings Forecasts
B I P I N A J I N K Y A , ∗ S A N J E E V B H O J R A J †,
AND PARTHA SENGUPTA‡
Received 27 May 2003; accepted 20 September 2004
ABSTRACT
We investigate the relation of the board of directors and institutional own-

ership with the properties of management earnings forecasts. We find that
firms with more outside directors and greater institutional ownership are more
likely to issue a forecast and are inclined to forecast more frequently. In addi-
tion, these forecasts tend to be more specific, accurate and less optimistically
biased. These results are robust to changes specification, Granger causality
tests, and simultaneous equation analyses. The results are similar in the pre–
and post–Regulation Fair Disclosure (Reg FD) eras. Additional analysis sug-
gests that concentrated institutional ownership is negatively associated with
forecast properties. This association is less negative in the post–Reg FD en-
vironment, which is consistent with Reg FD reducing the ability of firms to
privately communicate information to select audiences.
∗ University of Florida; †Cornell University; ‡University of Maryland. We thank Kate Camp-

bell, Charles Lee, Carol Marquardt, James Peters, and workshop participants at American
University, University of Florida, Georgia State University, Texas Christian University, and the
American Accounting Association’s 2003 annual meeting at Hawaii and the 14th annual Finan-
cial Economics and Accounting Conference at Indiana University. We also thank Thompson
Financial for generously providing us First Call analyst forecast and management forecast data
through their Academic program.
343
Copyright
C , University of Chicago on behalf of the Institute of Professional Accounting, 2005
344 B. AJINKYA, S. BHOJRAJ, AND P. SENGUPTA
1. Introduction
The U.S. corporate world is dominated by publicly traded firms with widely
dispersed ownership. Typically, shareholders designate firm managers to
run the company with the goal of maximizing shareholder wealth. Because
shareholders do not participate in day-to-day corporate activities, implicit
or explicit governance mechanisms assist in monitoring management ac-
tions and protecting shareholder interests.1 In this article we examine the
association between governance mechanisms and the extent and quality of
voluntary disclosure. Specifically, we examine the association of governance
mechanisms (i.e., outside directors and institutional investors) with man-
agement earnings forecast occurrence, as well as with the specificity (i.e.,
precision), accuracy, and optimism of the issued forecasts.
Prior work provides some evidence that the presence of outside directors
reduces the likelihood of financial fraud as well as earnings management
(Dechow, Sloan, and Sweeney [1996], Beasley [1996], Klein [2002]).2 In ad-
dition to monitoring the quality of financial information, outside directors
can play a role in determining and monitoring a firm’s voluntary disclosure
policy. Owing to their fiduciary duty toward shareholders, directors in gen-
eral have a responsibility to ensure greater transparency when it is in the
shareholders’ interests. Consistent with this responsibility, Osterland [2004]
reported that several companies, including Burlington and Comcast, have
established formal board-level committees to monitor corporate disclosure.
Outside directors, by virtue of their position and presumed independence,
are likely to possess greater incentives to ensure transparency when it is in
the shareholders’ interests, as compared with other directors. To the extent
that outside directors monitor disclosure policy and foster an environment
of greater transparency, we expect to find that firms with a larger propor-
tion of these directors have a greater propensity to issue forecasts. We also
expect the forecasts to be more specific, more accurate, and less optimisti-
cally biased. An alternative view is that outside directors may be ineffective,
either because they have allegiance to company managers or because of
fear of litigation (Mace [1986], Jensen [1993], National Investor Relations
Institute (NIRI) [2002]). This view works against our finding a positive asso-
ciation between outside directors and forecast properties. Using a sample of
management’s earnings forecasts issued from 1997 to 2002, we find results
that are consistent with the governance role of outside directors. We find
that the probability of occurrence of management earnings forecasts and
the frequency of such forecasts are positively associated with the percentage
1 See Shleifer and Vishny [1997] and Bushman and Smith [2001] for surveys of the corporate
governance literature in finance and accounting.

2 Prior work examining the role of outside directors finds that outside directors also play
an active role in monitoring corporate activities, such as replacing poorly performing CEOs
(Weisbach [1988]) and protecting shareholder interests during takeover fights (Shivdasani
[1993]).
OUTSIDE DIRECTORS, INSTITUTIONAL INVESTORS, AND EARNINGS FORECASTS 345
of the board that consists of outsiders. The results also suggest that com-
panies with a greater percentage of outside directors make more accurate
and less optimistically biased earnings forecasts. However, we do not find a
significant association between outside directors and the specificity of the
forecasts issued, which could be attributable to the directors’ fear of greater
litigation exposure that might result from more specific forecasts.
Prior work examining the link between institutional investors and a firm’s
information disclosure policy focuses on the association between analysts’
disclosure ratings and institutional ownership.3 Healy, Hutton, and Palepu
[1999] find that firms with sustained increases in disclosure (as proxied by
analyst ratings) experience an increase in institutional ownership. Bushee
and Noe [2000] find an association between analysts’ disclosure ratings
and institutional ownership using both levels and changes analysis. In this
study we extend the prior research on institutional ownership by examining
the association between institutional ownership and various properties of
management forecasts. We focus on management earnings forecasts as a
purer measure of voluntary disclosure of private information than analysts’
scores. Focusing on management forecasts also allows us to examine spe-
cific aspects of disclosure such as specificity and bias. Additional benefits of
focusing on management forecasts are a larger sample size and the ability
to examine a more recent period, including the post–Regulation Fair Dis-
closure (Reg FD) environment (analyst disclosure scores were discontinued
in 1996). Given that corporate disclosures, especially earnings forecasts, are
closely watched by institutions in addition to the constant investor probing
of companies for their earnings outlook, we expect institutional ownership
to be positively associated with a firm’s propensity to issue forecasts as well
as the specificity and accuracy of forecasts issued, and negatively associated
with managerial optimism. Consistent with our hypotheses, we find that
firms with higher institutional ownership are more likely to issue a man-
agement forecast. Over the six-year sample period, these firms also issue
forecasts more frequently and the forecasts issued tend to be more specific
(or precise). Using a subsample of point forecasts, we also find that forecast
accuracy (absolute forecast error) is positively (negatively) associated with
institutional ownership, whereas forecast optimism bias is negatively asso-
ciated with institutional ownership; that is, managers of firms with higher
institutional ownership are more conservative in their forecasts.
Prior research suggests that institutions are not a homogenous group and
that their incentives are likely to be determined by ownership concentration
3 Other work examining the role of institutional investors focuses on whether these share-
holders help protect investor interests in various contexts, including mergers and takeovers
and management turnovers, and whether they help enhance firm performance and value (e.g.,
Denis and Serrano [1996], Jarrell and Poulsen [1987], Kang and Shivdasani [1995], Shivdasani
[1993], Weisbach [1988]). Other research explores the effects of governance on CEO com-
pensation (e.g., Core, Holthausen, and Larcker [1999]) and effects of governance on the cost
of debt (Bhojraj and Sengupta [2003]).
(e.g., percentage of company’s common stock held by the five largest insti-
tutional owners of the firm), which affects their ability to generate private
information and benefits (e.g., see Agrawal and Mandelker [1990], Porter
[1992]). Testing the effect of such concentration (or blockholding), we
find that firms with concentrated institutional ownership, with their inher-
ent ability to generate private information and benefits, are less likely to
promote voluntary disclosure. In this case we find that firms are less likely
to issue earnings forecasts, and the forecasts issued tend to be less specific.
Hence, concentration of institutional ownership has an adverse effect on
disclosure properties.
We examine several alternative explanations for our findings. For exam-
ple, prior work exploring the effect of disclosure on institutional ownership
(Healy, Hutton, and Palepu [1999], Bushee and Noe [2000]) suggests that
institutions prefer to buy stock in firms that have superior disclosure or have
experienced sustained disclosure increases. However, it seems reasonable
that once institutions invest in a particular company they are likely to have
added incentives to encourage further improvements in disclosure. This sug-
gests that the link between institutional ownership and disclosure is likely
to be endogenous. We carry out several tests examining this issue, including
using changes specification and lead-lag (Granger causality) analysis, and
controlling for endogeneity between the variables. The link between insti-
tutional ownership and forecast properties could also be driven by analyst
following, which is shown in prior work to be related to both disclosure and
institutional holding (see, for example, Lang and Lundholm [1996] and
O’Brien and Bhushan [1990]). Similarly, the results on board composition
could be driven by underlying firm characteristics that are associated with
both disclosure and board composition. We carry out several robustness tests
to reduce the possibility that these potential alternative explanations are the
source of our results. Although it is impossible to eliminate these explana-
tions, the additional tests indicate an association between outside directors,
institutional ownership, and forecast properties, thereby providing greater
confidence in interpreting the results.
Our sample includes annual earnings forecasts issued from 1997 to 2002.
In October 2000 a structural change occurred in the voluntary disclosure
regulation, with the introduction of Reg FD, which prohibits firms from
privately disclosing information to select audiences. Although this regula-
tion has increased the number of forecasts issued (Heflin, Subramanyam,
and Zhang [2003], Bailey et al. [2003]), the question is whether outside
directors and institutional ownership can explain cross-sectional variation
in forecast issuances and their properties after Reg FD. We examine this
issue as well as any effect that the structural shift might have had on the
incentives of outside directors and institutional investors through a sub-
period analysis. The results suggest no significant differences in the as-
sociation of the two governance proxies with forecast properties in the
pre– and post–Reg FD eras. However, the association between concen-
trated institutional ownership and the probability of forecast occurrence
is less negative in the post–Reg FD era, which is consistent with Reg FD

reducing the ability of firms to privately communicate information to select
audiences.
Our results, linking institutional ownership and outside directors to vol-
untary disclosure, are interesting given the current scrutiny of corporate
governance mechanisms and the state of the financial reporting system.
Governance mechanisms and the financial reporting system have come un-
der siege in the wake of a series of financial scandals including Enron and
WorldCom. These scandals have led to a greater focus on the need for
stronger governance and more transparent disclosure. Our results suggest
that the two are linked—stronger governance appears to be associated with
more transparent disclosure.
In a recent working paper, Karamanou and Vafeas [2004] also address the
link between corporate governance and disclosure decisions. As in our study,
they examine the effects of governance on the properties of management
forecasts. They use a much smaller sample consisting of management fore-
casts issued by 275 Fortune 500 firms from 1995 to 1999 but they examine
a broader set of governance variables including number of board meetings
and measures of audit committee composition. Their findings relating to
the effect of institutional ownership and outside directors on the properties
of management forecasts are generally similar to those we report here.4
The rest of the paper is organized as follows. Section 2 develops the main
hypotheses, and section 3 outlines the method we adopt to test our hypothe-
ses. The results are provided in section 4. Section 5 details the additional
analyses and robustness checks, and section 6 summarizes and concludes
the paper.
2. Outside Directors, Institutional Owners,

and Earnings Forecast Properties
2.1 OUTSIDE DIRECTORS AND EARNINGS FORECAST PROPERTIES
Several prior studies document the favorable impact of outside directors
on firm decisions aimed at enhancing shareholder wealth.5 Consistent with
4 The other governance variables Karamanou and Vafeas [2004] use generally turn out to
be statistically insignificant in their regressions except for audit committee size, which seems
to be negatively associated with the probability of issuing a forecast and the precision of the
forecast. They also partition the forecasts into good news and bad news, and find that the
effect of governance is stronger for bad news disclosures and that precision decreases with
governance only when bad news is conveyed. We, on the other hand, provide simultaneous
analyses of the endogeneity between the characteristics of management forecasts and selected
governance variables. We also analyze the effect of concentrated institutions on disclosure and
use this variable as interacting with sample periods pre– and post–Reg FD to examine the effect
of FD on disclosure (see our later discussion).
5 Research shows that firms with outsider-dominated boards are more likely to participate
in major restructuring events such as mergers, takeovers, and tender offers (Lin [1996]) and
are more likely to remove poorly performing CEOs (Weisbach [1988]) and nominate outside
these studies, Dechow, Sloan, and Sweeney [1996] and Beasley [1996] find
a negative association between outside directors and likelihood of finan-
cial fraud. Similarly, Klein [2002] documents a negative relation between
outside directors and earnings management. Finally, Sengupta [2004] docu-
ments that firms with more outside directors are more likely to release their
quarterly earnings figures early. These studies suggest that the monitoring
role of outside directors extends to the financial reporting process.
Prior work studying earnings forecasts suggests that managers acting
in the best interests of the firm should enhance transparency by issuing
more frequent, specific, and accurate forecasts (Skinner [1994], Kasznik
and Lev [1995], Kim and Verrecchia [1991], Baginski, Conrad, and
Hassell [1993], Williams [1996]).6 However, managers acting in their
own self-interest could decide to disclose less than what is optimal for
various reasons, including insider trading opportunities and reputational
risks of erroneous forecasts. Outside directors can mitigate managerial
self-interest and influence the issuance and properties of earnings forecasts
by directly reviewing the disclosure policy and earnings releases as well
as by fostering an environment that encourages greater transparency.
The NIRI [2002], in discussing issues related to earnings guidance
and directors’ role in evaluating the guidance, finds that although the
Sarbanes-Oxley Act does not expressly require the board to review earnings
releases, several prominent securities lawyers say they advise their clients
to do so. Along similar lines, Corporate Board Member magazine [2004]
identifies the evaluation of investor communications including quarterly
teleconferences and press releases as a key role of directors. In addition,
a New York Stock Exchange (NYSE) listing requirement is that the audit
committee of the board discuss with management information that is
presented in press releases, including earnings guidance. As an illustration,
one of the key responsibilities and duties of the audit committee of the
board of directors for Verizon is to “review and discuss with manage-
ment any proposed public release of earnings or guidance information”
(http://investor.verizon.com/corp gov/audit finance committee.html).7
The preceding discussion suggests that a greater proportion of outside
CEOs (Borokhovich, Parrino, and Trapani [1996]). Rosenstein and Wyatt [1990] document
that shareholder wealth increases with the addition of outsiders to the board, and Cotter,
Shivdasani, and Zenner [1997] provide evidence that outside directors enhance shareholder
wealth during tender offers.
6 The willingness to enhance transparency, and therefore the optimal disclosure policy, is
constrained by the costs of disclosure (including proprietary and litigation costs).

7 We contacted a few companies and directors to obtain further information and anecdotal
evidence on this issue. Our sense is that board meetings occur regularly and earnings releases
(including guidance) are discussed. In addition, board members are generally given copies of
earnings releases ahead of time. One director we spoke to informed us that the audit committee
discussed earnings announcements and guidance with the management. If the guidance is off-
mark, the board would hold the management accountable.
directors (presumably more independent and effective members) should

have a favorable effect on earnings forecast properties.
However, an alternative view is that outside directors may be ineffec-
tive, either because they are appointed by, or have allegiance to, company
managers or because the board culture discourages conflict (Mace [1986],
Jensen [1993]).8 The effectiveness of outside directors and the extent to
which they represent shareholder interests could also be influenced by the
fear of litigation and reputation costs. For example, directors may not induce
managers to disclose more precise forecasts for fear of personal litigation
and reputation costs. To the extent that the directors’ own incentives affect
their ability to act on behalf of the shareholders, it would bias our results
against the hypothesis that outside directors would have a favorable effect
on the properties of management forecasts. The following hypothesis sum-
marizes our expectations.
H1: Firms with a greater percentage of outside directors on their boards
(a) are more likely to issue earnings forecasts, (b) issue forecasts
more frequently, (c) are more likely to issue specific (precise) fore-
casts, (d) are more likely to issue accurate forecasts, and (e) are less
likely to issue optimistic forecasts.
2.2 INSTITUTIONAL OWNERSHIP AND EARNINGS FORECAST PROPERTIES
Institutions desire and demand more disclosure. Disclosures, especially
earnings forecasts, are closely watched by market participants.9 This can be
found by listening in on conference calls, where institutions consistently
probe the company for more specific, unbiased, and accurate information
about future earnings. Brokerage houses regularly hold conferences where
firms make presentations to institutional shareholders about the prospects
of the company. Prior work (e.g., Healy, Hutton, and Palepu [1999], Bushee
and Noe [2000]) suggests that institutions prefer to buy stocks in firms that
have sustained disclosure enhancements. It seems reasonable that these in-
stitutions would continue to demand further augmentation of disclosure
from the firms. A key precept of the International Corporate Governance
Network, a group representing the interests of major institutional investors,
corporations, and financial intermediaries, is related to communications
and reporting and states that “corporations should disclose accurate, ade-
quate, and timely [italics added] information . . . so as to allow investors to
make informed decisions about the acquisition, ownership obligations and
rights and sale of shares” (Conference Board [2001, p. 10]).
8 Consistent with these arguments, Yermack [1996] and Bhagat and Black [1997] fail to
document an association between the proportion of independent outside directors and firm
performance.
9 A sell-side (brokerage house) analyst we spoke to stated that one of the key pieces of
information the buy-side (including pension funds and asset management funds) investors
consistently demand from her and the companies whose stock they own is information about
near-term earnings.
In a recent survey of more than 1,300 fund managers and financial an-
alysts aimed at identifying the best CFOs, Institutional Investor reports that
“companies, and CFOs, are being rewarded for delivering on promises. At
Pfizer, Shedlarz’s ability to set firm financial targets and then hit them has
earned praise. Daley of P&G gets high marks for issuing earnings guidance
early and often” (Osterland [2004, p. 35]). Therefore, though institutions
might not be able to directly oversee the activities of the manager (given
that they are outsiders), they could elicit greater transparency by demand-
ing more information from the firm. Given this disclosure-oriented focus of
institutions and their constant probing of companies for their earnings out-
look, we expect to see a positive association with a firm’s propensity to issue
forecasts, the specificity and accuracy of forecasts issued, and a decrease in
the managerial optimism bias of forecasts. Our expectations about the im-
pact of institutional ownership on the properties of management forecasts
can be summarized in the following hypothesis.
H2: Firms with a greater percentage of institutional ownership (a) are
more likely to issue earnings forecasts, (b) issue forecasts more
frequently, (c) are more likely to issue specific (precise) forecasts,
(d) are more likely to issue accurate forecasts, and (e) are less likely
to issue optimistic forecasts.
3. Methodology
3.1 SAMPLE SELECTION AND DESCRIPTION
We obtain management earnings forecast data from the Corporate In-
vestor Guidelines (CIG) database, maintained by First Call. The CIG
database covers the period from mid-1994 to mid-2003 and has earnings
as well as nonearnings forecasts made by companies before the official re-
lease of reported earnings. It includes point forecasts, range forecasts, open-
ended forecasts, and qualitative forecasts (such as “comfortable with analyst
expectations”). First Call carries both annual and quarterly forecasts.10
In this study we report results based on annual earnings forecasts only.
Separate analyses based on quarterly forecasts were also performed and
these are discussed in section 5.6. Panel A of table 1 provides a summary
of the screens applied to identify the primary management forecast sample
10 We performed a small-sample test of the comprehensiveness of the CIG database. We picked
June 1997 and June 2000 for our test and compared the 182 and 211 forecasts appearing in
the CIG database with those extracted from a search of the Factiva (formerly known as the
Dow Jones News Retrieval) database. Keywords “expects earnings,” “expects income,” “expects
losses,” “expects profits,” “expects results,” and three similar lists with first words “forecasts,”
“predicts,” and “sees” were used to identify forecasts from Factiva. These keywords are consistent
with those used by Baginski, Hassell, and Kimbrough [2002]. The Factiva search turned up
53 and 84 forecasts made in June 1997 and June 2000, respectively, suggesting that the CIG
database is a comprehensive source of management forecast information.
TABLE 1
Sample Selection and Description
Panel A: Sample-selection criteria
All Forecasts Point Forecasts
Initial sample of all annual forecasts 24,406 5,825
Less:
Nonearnings forecasts (1,097) (257)
Preannouncements (1,544) (501)
Multiple forecasts for the same fiscal period (11,664) (1,692)
Firms not followed by at least three analysts (4,244) (1,091)
Forecasts not for 1997–2002 (1,366) (766)
Governance data unavailable (815) (231)
Compustat and other financial data unavailable (742) (242)
Usable annual forecastsa 2,934 1,045
Number of different companies 1,467 695
Panel B: Distribution of the frequency of earnings forecasts made by a firm during 1997–2002
1 2 3 4 5 or More Total
Number of firmsb 267 183 142 120 541 1,253
Panel C: Distribution of the specificity of earnings forecasts made by firms during 1997–2002
Point Range Open Ended Other Total
Number of forecastsc 873 1,272 551 68 2,764
a
For tests of occurrence, the forecasting samples were matched with all nonforecasting firms for which
requisite data were available to compute the independent variables (4,811 firm-year observations), resulting
in the combined sample of 7,745 observations.
b
Tests of forecast frequency could be performed based on a potential sample of 1,467 firms (from
panel A, column 2). However, because forecast frequency from 1997 to 2002 was regressed on averages of
the independent variables over the sample period, firms that did not have at least three years of data were
dropped, resulting in the reduced sample of 1,253 observations.
c
Tests of forecast specificity could be performed based on a potential sample of 2,934 observations
(forecasting sample in panel A). However, some observations were deleted because analyst following
information just before the forecast was not available, resulting in a sample of 2,764 observations. Sample
size information is provided at the bottom of each table reporting the regression results.
used in our tests. Initially, we selected all annual earnings forecasts made be-
fore the fiscal period-end (excluding pre-announcements) for 1997–2002.11
Year 2002 is the last complete year for which explanatory variable data were
available. We ignored forecasts made before 1997 for two reasons. First, the
number of usable forecasts is substantially lower for years before 1997. It is
not clear whether this is solely because of the fewer forecasts made during
this period or whether the data collection in the earlier years was less com-
prehensive. Second, for tests of the probability of forecast occurrence, we
match the management forecast sample with all other (nonforecast) firms
by fiscal period for which the requisite data could be obtained. Although
the sample was restricted to six years in an effort to reduce problems of
interdependence of observations that arise from pooling financial data for
the same firm over multiple years, the duration accommodated the pre– and
11 We define pre-announcements as management forecasts issued after the fiscal period end
but before the actual earnings announcements.

post–Reg FD periods. To reduce further problems of data interdependence,

if a company made multiple forecasts during a fiscal period, we retained only
the latest forecast.12
The sample of management earnings forecasts was then matched with
First Call data on financial analyst following. Companies that did not have
valid ticker symbols or were not followed by at least three analysts were
dropped.13 The observations that satisfied the preceding criteria were then
matched with the specified governance data (institutional ownership and
outside directors) collected from Compact Disclosure. This database pro-
vides information on stock ownership collected from Spectrum and infor-
mation on officers and board of directors collected from proxy statements.
The June CD-ROM for each of the years 1997 to 2002 was examined to obtain
institutional ownership and outside directors’ information. The ownership
data in these CD-ROMs represent holdings as of March 1 of each year. Ev-
ery forecast observation was matched with the institutional ownership as
of the period immediately preceding March. Thus, a forecast made in be-
tween March and December 2000 is matched with institutional ownership
as of March 2000, whereas forecasts made in January or February 2000 were
matched with institutional ownership as of March 1999. Data on officers
and boards of directors were based on the latest available proxy statement
included in the June CD-ROMs. Finally, some observations were lost because
of lack of data for control variables (obtained mainly from Compustat). The
final sample comprises 2,934 annual management earnings forecasts (1,045
point forecasts).14 The control group of companies initially consisted of all
firms for which First Call analyst forecast information was available for 1997
to 2002 and for which the company did not make a management earnings
forecast. We deleted all firms with less than three analysts following the firm,
missing Compustat data, and missing institutional ownership and outside
directors’ data, resulting in a final control sample of 4,811 observations. We
avoid problems relating to outliers by winsorizing the variables at the 1%
and 99% levels.
12 Analyses carried out after retaining the earliest of multiple forecasts yielded similar results.
13 The analysts screen was necessary because one of the key control variables is the standard
deviation of analysts’ forecasts. Analyses carried out without applying this screen yielded similar
results (we replaced the standard deviation of analysts’ forecasts with the standard deviation of
stock returns).
14 The actual number of observations used in the regressions varies. For tests of occurrence,
the management forecast sample was matched with all other firms for which First Call, gover-
nance, and other financial data were available, resulting in 7,745 observations (2,934 forecasting
and 4,811 nonforecasting). For tests of frequency, the number of forecasts made by a company
during 1997–2002 was matched with averages of all control variables calculated from 1997 to
2002. If a company did not have at least three years’ of data it was dropped, resulting in a
sample of 1,253 observations (firms). Tests of forecast specificity were based on a sample of
2,764 forecasts (some of the original forecast sample firms were missing analyst following infor-
mation before the earnings forecast). For tests of forecast error and bias, only point forecasts
were used, resulting in a sample of 1,045 observations (for further clarification, see footnotes
to table1).
Panel B of table 1 shows the forecast frequency for the sample of 1,253
firms making annual forecasts from 1997 to 2002. The table reveals that
267 companies made only one forecast during the six-year period, whereas
541 firms made five or more earnings forecasts over the period. Panel C of
table 1 provides data on the specificity of the forecasts. The table shows that
a large proportion of the forecasts are point and range forecasts.
3.2 RESEARCH DESIGN
3.2.1. Measures of Forecast Properties. To examine the association of insti-
tutional ownership and outside directors to voluntary disclosure, we focus
on several aspects of management forecasts. Our primary measure is the
probability of occurrence of forecasts, defined as:
OCCUR = 1 if the firm issued an earnings forecast during the fiscal
period, and 0 otherwise
For tests of forecast occurrence, a firm that issues multiple forecasts and
one that issues just a single forecast in the period are treated the same. Simi-
larly, a firm might issue just one forecast in our sample period whereas others
might be more consistent in their disclosure policy. Sporadic occurrence of
forecasts could be attributed to managerial opportunism, as opposed to a
consistent disclosure policy induced by governance. If effective governance
is inducing disclosure, we should find an association between the number
of forecasts that a firm issued (in our sample period) and the governance
variables. This would lend additional support to the results from the occur-
rence specification. To test this we define the frequency, or total incidence
of forecasts, as:
FREQ = total number of forecasts issued by a firm in our sample period
(1997–2002)
To evaluate the effect of governance variables on the quality of earnings
forecasts issued by management we focus on specificity, accuracy, and opti-
mism (bias) of the forecasts:
SPECIFIC = 3 if the firm issued a point forecast during a fiscal period, 2
if an interval forecast, 1 if an open-ended forecast, and 0 if
a qualitative forecast
ERROR = absolute value [(management forecast of earnings per share
(EPS) − actual EPS)/price at the beginning of the fiscal
period]. Accuracy of forecasts is the inverse of ERROR.15
15 The actual earnings numbers, as well as the forecasts, are both derived from First Call
to ensure consistency across the two numbers. The actual earnings number represents the
actual per share numbers reported by the companies following a fiscal period-end. According
to First Call, the actual values have been adjusted to exclude any unusual items that a majority
of the contributing analysts deem nonoperating or nonrecurring. Similarly, the majority of
analysts’ estimates on First Call are real time and come from broker notes or through electronic
transmission and are adjusted to exclude any unusual items that a majority of the contributing
BIAS = [(management forecast of EPS − actual EPS)/price at the

beginning of the fiscal period]. If BIAS > 0, the earnings
forecast is optimistically biased.
3.2.2. Measures of Corporate Governance. To determine the association be-
tween the voluntary information disclosure environment and corporate gov-
ernance, we specify two widely used measures of corporate governance—the
proportion of the board consisting of outsiders and the proportion of ag-
gregate institutional ownership:
OUTDIR = percentage of the board of directors that are not also officers
of the firm16
INST = percentage of the company’s aggregate common stock held
by institutions
3.2.3. Control Variables. Based on prior research, we selected several addi-
tional independent variables to control for other possible determinants of
the properties of management forecasts:
LMVAL = log of the market value of a firm’s common equity at the
beginning of the fiscal period. The prior literature provides
evidence supporting the positive association between firm
size and management earnings forecasts (e.g., Kasznik and
Lev [1995]).
AUDIT = 1 if the company is audited by one of the Big 5 auditors,
and 0 otherwise. Auditor reputation could also be a factor
in disclosure decisions. Thus, prior research indicates that
firms using Big 5 auditors tend to have better disclosure
(Lang and Lundholm [1993]).
NUMEST = number of analysts following the firm. Prior research (Lang
and Lundholm [1993, 1996]) documents a positive associa-
tion between corporate disclosure quality and the number
of analysts following a firm.
LITIGATE = 1 for all firms in the biotechnology (2833–2836 and 8731–
8734), computers (3570–3577 and 7370–7374), electron-
ics (3600–3674), and retail (5200–5961) industries, and
analysts deem nonoperating or nonrecurring. We called First Call to discuss this issue and
were told that in the event of an outlier analyst forecast or perceived nonconformity of an
analyst with the construct of the majority of analysts, an editor contacts the outlier analyst to
determine whether it is just a difference of opinion or difference in construct, and the editor
takes corrective action accordingly. To the extent that management guidance is intended to
influence analysts’ forecasts and market expectations, it would seem reasonable that managers
are forecasting the same construct as analysts (and First Call actuals). However, it is possible in
some cases that the construct that managers are forecasting and that is captured on First Call
is different from the analysts’ forecasts and actual earnings construct. Unless this difference
is systematically correlated with our explanatory variables of interest (INST and OUTDIR), it
should not bias our results.
16 We also use the number of outside directors as an alternative proxy for this variable. This
yielded results that are similar to those reported with OUTDIR.

0 otherwise (based on Francis, Philbrick, and Schipper

[1994]). Furthermore, Jones and Weingram [1996] find
that market capitalization and equity beta are both deter-
minants of litigation risk. We use both these measures as
controls in our analyses.
MKBK = ratio of market value to book value of common equity at the
beginning of the fiscal period. We use MKBK as a proxy for
proprietary costs (Bamber and Cheon [1998]). In keeping
with Bamber and Cheon [1998], we also use sales concen-
tration as an alternative proxy to measure proprietary costs.
The results based on this second proxy (not reported) were
similar to those using MKBK .
LOSS = 1 if the firm reported losses in the current period, and
0 otherwise. Prior research suggests that earnings are less
value relevant for loss-making firms (Hayn [1995]) and that
meeting or beating financial analyst expectations is less im-
portant for these firms (Degeorge, Patel, and Zeckhauser
[1999]). Brown [2001] documents substantial differences
between the analyst forecast errors of loss and profit firms.
Analysts have greater problems forecasting earnings for
loss firms. It is therefore likely that management’s ability
to forecast earnings would be similarly circumscribed for
firms making losses.
HORIZON = number of days between the forecast date and the fiscal
period-end date. Prior work uses this measure to proxy for
greater earnings uncertainty and the unobservable preci-
sion of managers’ beliefs (Baginski and Hassell [1997]).
SURPRISE = absolute value [(management forecast of EPS − median
analyst forecast of EPS)/price at the beginning of the fiscal
period]
DISPFOR = standard deviation of analysts’ forecasts divided by the me-
dian forecast. This variable captures the interanalyst uncer-
tainty in the earnings prospects of a firm (Ajinkya and Gift
[1984], Brown, Foster, and Noreen [1985], Swaminathan
[1991]). Analogously, management would also likely find
it more difficult to forecast earnings when the value of
this variable is higher and could face greater litigation
exposure.
NEWS = 1 if the current-period EPS is greater than or equal to the
previous-period EPS, and 0 otherwise. Baginski, Hassell,
and Kimbrough [2002] find that the sign of random-walk
differences in earnings is negatively associated with fore-
cast occurrence. Bhojraj [2002] suggests that a reason for
this negative association is that management is likely to is-
sue a forecast in this case (i.e., if NEWS = 0) to prevent
unfavorable litigation.
EARNVOL = standard deviation of quarterly earnings over 12 quarters

ending in the current fiscal year, divided by median asset
value for the period. Waymire [1985] finds an association
between a firm’s earnings volatility and the frequency of
management earnings forecasts. Kross, Lewellen, and Ro
[1994] use a similar measure called stability, defined as the
standard deviation of return on equity.
BETA = equity beta for the fiscal period. This variable represents
the proxy for market risk (Bushee and Noe [2000]).
FD = 1 if the observation is related to the post–Reg FD pe-
riod (after October 2000), and 0 otherwise. Heflin, Sub-
ramanyam, and Zhang [2003] and Bailey et al. [2003] find
that the number of forecast issuances has increased after
Reg FD.
The variables DISPFOR, EARNVOL, and BETA (and to a limited extent
LOSS) capture different and possibly overlapping dimensions of uncer-
tainty; hence, the respective coefficients of these variables may not all be
statistically significant. The appendix provides a complete listing of all vari-
able definitions.
3.2.4. Regression Specifications. The specifications of the various regres-

sions are as follows:
OCCUR = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT
+ α5 NUMEST + α6 DISPFOR + α7 LITIGATE + α8 MKBK
+ α9 LOSS + α10 NEWS + α11 EARNVOL + α12 BETA + α13 FD
(1)
FREQ = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT

+ α9 LOSS + α10 NEWS + α11 EARNVOL + α12 BETA (2)
SPECIFIC = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT

+ α9 LOSS + α10 NEWS + α11 EARNVOL
+ α12 BETA + α13 FD +14 HORIZON (3)
ERROR = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT

+ α9 LOSS + α11 EARNVOL + α12 BETA + α15 SURPRISE (4)
BIAS = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT + α5 NUMEST

+ α6 DISPFOR + α7 LITIGATE + α8 MKBK + α9 LOSS
+ α11 EARNVOL + α12 BETA + α15 SURPRISE (5)
Because the dependent variable, OCCUR, is a binary variable, we estimate

equation (1) with a probit model. For the dependent variable, SPECIFICITY ,
which has four ordinal values, we use an ordered probit model on equation
(3). We use an ordinary least squares (OLS) model to estimate equations
(2), (4), and (5). For tests of occurrence, NUMEST and DISPFOR were
calculated based on the last analyst forecast data available before the fiscal
year-end. For the other four dependent variables, NUMEST and DISPFOR
were calculated based on the latest data available before the management
forecast date.
4. Results
Summary descriptive statistics for selected variables are provided in pan-
els A and B of table 2. Panel A provides summary statistics for variables based
on 2,934 annual forecast observations. Summary statistics for ERROR, BIAS,
HORIZON , and SURPRISE are based on the sample of 1,045 observations
used for tests of forecast accuracy and bias. Panel B of table 2 also pro-
vides summary statistics of the key variables for the control (nonforecasting)
group. Forecasting firms tend to be larger, with a median market value of
equity of about $1.43 billion compared with approximately $805 million for
the nonforecasting sample. Median institutional ownership is about 64% for
the forecast sample and about 54% for the nonforecast sample. The median
number of analysts following the firm is eight for the forecast sample and
six for the nonforecasters.
Table 3 presents results of our basic analysis examining the link between
our governance measures and forecast occurrence, frequency, and speci-
ficity. Column 3 shows that the probability of occurrence of a management
earnings forecast is, as expected, positively associated with the two gover-
nance variables, OUTDIR and INST , and the respective coefficients are sta-
tistically significant at the .01 level. Several of the control variables in this
regression are in the expected direction and significant (including LMVAL,
NUMEST , LOSS, and BETA). Consistent with Miller and Piotroski [2000],
we find that LITIGATE has a positive and significant effect on forecast oc-
currence. The coefficient on FD is positive and highly significant, which is
consistent with prior work (Heflin, Subramanyam, and Zhang [2003], Bailey
et al. [2003]) that shows an increase in the level of forecast activity after the
introduction of Reg FD. Heflin, Subramanyam, and Zhang [2003] argue
that previously private information releases might be substituted for public
disclosures after Reg FD.
Column 4 of table 3 provides regression results of tests of the effect of our
governance measures on the frequency of earnings forecasts. The results
TABLE 2
Descriptive Statistics
Variables Mean Std. Dev. Median 25% 75%

Panel A: Forecasting group
ERROR a 0.022 0.067 0.003 0.001 0.017
BIAS a 0.018 0.068 0.000 −0.001 0.015
HORIZON a 173.881 112.364 161.000 70.000 263.000
SURPRISE a 0.007 0.017 0.001 0.000 0.004
INST 60.977 21.859 64.100 47.400 77.200
INST5 24.534 10.354 23.861 17.422 30.943
INSTCONS 0.023 0.032 0.018 0.010 0.029
OUTDIR 71.633 19.803 76.923 66.667 84.615
MVAL b 8.612 28.095 1.425 0.534 5.020
AUDITOR 0.759 0.428 1.000 1.000 1.000
NUMEST 9.685 6.097 8.000 5.000 13.000
DISPFOR 0.004 0.069 0.001 0.000 0.002
LITIGATE 0.307 0.461 0.000 0.000 1.000
MKBK 4.202 5.108 2.714 1.714 4.686
LOSS 0.123 0.329 0.000 0.000 0.000
NEWS 0.478 0.500 0.000 0.000 1.000
EVARNVOL 0.034 0.084 0.014 0.008 0.030
BETA 1.047 0.699 0.913 0.595 1.342
DE 0.490 0.382 0.451 0.103 0.914
YIELD 0.010 0.015 0.001 0.000 0.015
LIQUID 0.148 0.843 0.098 −0.347 0.660
Panel B: Control groupc

MVAL b 4.291 14.788 0.805 0.303 2.645
INST 50.413 25.837 53.580 31.510 70.750
OUTDIR 68.535 21.690 73.684 60.000 83.333
MKBK 3.871 5.219 2.400 1.564 4.083
NUMEST 7.568 5.005 6.000 4.000 10.000
Variables are defined in the appendix.
a
Summary statistics for ERROR, BIAS, HORIZON , and SURPRISE are based on the sample of 1,045
point forecasts; summary statistics for the other variables are based on the sample of 2,934 annual earnings
forecasts.
b
MVAL represents market value of common equity in $ billions. In regressions, log of market value of
common equity (in $ millions) is used.
c
The summary statistics for the control sample were calculated based on the sample of 4,811 observations
that were matched with the annual forecast data for tests of occurrence.
indicate that the coefficient on OUTDIR is positive and significant at the

.05 level. The coefficient on INST is also positive and significant (one sided
p-value < .05). Thus, it appears that firms with effective governance mecha-
nisms in place are likely to have more frequent earnings forecast disclosures.
Fewer of the control variables are significant in explaining FREQ compared
with OCCUR. NUMEST and LITIGATE cease to be significant in explain-
ing forecast frequency. However, the results suggest that firms with greater
volatility (proxied by EARNVOL) are likely to issue forecasts less frequently.
Next, we evaluate another important property of the dependent variable,
that is, how specific (or precise) the disclosure is provided that disclosure
(management forecast) occurs. Column 5 of table 3 summarizes the results
TABLE 3
Regression Results of the Effects of Outside Directors and Institutional Ownership on the Probability
of Occurrence of Annual Earnings Forecasts, Frequency, and Specificity
Forecast Occurrence Forecast Frequency Forecast Specificity

Predicted Sign (OCCUR) (FREQ ) (SPECIFIC)
Intercept ? −1.5804 −2.7708 2.0473
(−15.226)∗∗∗ (−2.684)∗∗∗ (12.899)∗∗∗
OUTDIR + 0.0030 0.0164 −0.0006
(4.048)∗∗∗ (1.680)∗∗ (−0.572)
INST + 0.0085 0.0130 0.0039
(12.937)∗∗∗ (1.963)∗∗ (4.022)∗∗∗
LMVAL + 0.0466 0.9197 −0.0329
(3.642)∗∗∗ (6.458)∗∗∗ (−1.829)
AUDIT + 0.0328 0.2610 −0.1111
(0.930) (0.851) (−2.207)
NUMEST + 0.0203 0.0493 0.0066
(5.641)∗∗∗ (1.068) (1.259)
DISPFOR − −0.0335 −0.1592 −0.2106
(−0.201) (−0.737) (−0.553)
LITIGATE ? 0.1906 −0.0605 0.0605
(4.948)∗∗∗ (−0.190) (1.183)
MKBK − 0.0050 0.0128 0.0043
(1.506) (0.346) (1.025)
LOSS − −0.4195 −1.2942 −0.1994
(−9.387)∗∗∗ (−2.814)∗∗∗ (−3.052)∗∗∗
NEWS − 0.0213 1.8266 0.0172
(0.687) (3.037) (0.395)
EARNVOL − (0.0920) −2.0710 0.0173
(0.878) (−2.115)∗∗ (0.872)
BETA − −0.1505 −1.1278 −0.0449
(−5.829)∗∗∗ (−4.321)∗∗∗ (−1.369)∗
HORIZON − 0.0004
(2.538)
FD + 0.5887 −0.1251
(17.883)∗∗∗ (−2.674)∗∗∗
Log likelihood −4,607.12 −3,109.79
Adjusted R 2 0.20
No. of observations 7,745 1,253 2,764
Variables are defined in the appendix. White’s [1980] heteroskedasticity-adjusted t-values are provided
in parentheses below each coefficient.
∗ ∗∗
, , and ∗∗∗ indicate significance at the 10%, 5%, and 1% levels, respectively (one-tailed test, except for
the intercept and LITIGATE).
of the ordered probit regression. INST is positively associated with the speci-
ficity of earnings forecasts (significant at the .01 level). Outside directors,
however, do not seem to influence the specificity of forecasts. The coeffi-
cient is negative, although not statistically significant. This finding could be
attributable to the personal incentives (discussed earlier), including fear of
litigation, constraining the outside directors’ willingness to facilitate more
specific disclosure. Although outside directors might be willing to facilitate
forecast issuance, they might leave the specificity of the forecast to the dis-
cretion of the manager. Among the control variables, the result relating to
LOSS is particularly interesting. The evidence from the last three columns
suggests that a manager is less likely to have issued a forecast when the firm
reports a loss.
Another provocative finding is that although forecast occurrence has in-
creased after Reg FD (column 3), specificity is reduced (column 5). Thus
the coefficient for FD is negative and significant at the .01 level in column 5.
Although this finding may be explained in various ways, we posit the fol-
lowing hypothesis. When the forecast environment changed after Reg FD
(and the financial analyst channel was shut off), firms for which the cost-
benefit ratio of disclosure was marginally unfavorable before Reg FD might
be willing to forecast earnings publicly for the first time provided they could
do so with less specificity and thereby reduce the costs of disclosure. This
may suggest why after Reg FD, the specificity would be reduced even though
occurrence has increased.17
Results of tests of the association of corporate governance with the accu-
racy of management earnings forecasts are presented in table 4 (dependent
variable used is ERROR, inverse of accuracy). Outside directors (OUTDIR)
are, as expected, positively (negatively) associated with forecast accuracy
(ERROR), with the coefficient statistically significant at the .01 level. The
coefficient on INST is also positively related to accuracy and statistically sig-
nificant at the .01 level. This finding is in accordance with institutions consis-
tently probing firms for more accurate information. Among the control vari-
ables, HORIZON , DISPFOR, EARNVOL, and SURPRISE are influential when
the dependent variable is management forecast ERROR. A longer HORIZON
measure (i.e., earlier management forecast relative to fiscal year-end date)
suggests a greater forecast error. DISPFOR, which measures interanalyst earn-
ings forecast uncertainty, is positively associated with management forecast
ERROR.
Table 4 also summarizes the regression results of the association of the gov-
ernance variables with the ex post bias in management earnings forecasts. A
positive value of BIAS suggests that managers are optimistic in their forecasts.
The table shows that the coefficients for OUTDIR and INST are negative, as
expected, and significant at conventional levels. This is consistent with the
view that a greater proportion of outside directors and larger institutional
ownership are associated with more conservative (as opposed to optimistic)
forecasts. The coefficients of the control variables HORIZON , EARNVOL,
and SURPRISE are statistically significant in expected directions.18
17 We conducted additional analysis to check whether our conjecture is valid. We tabulated
specificity for two groups of firms: (1) those that forecast only in the post–Reg FD period and
did not forecast in the pre–Reg FD period, and (2) those that disclosed both in the pre– and
post–Reg FD period. The first group had lower specificity, consistent with our argument. The
difference in specificity between the two groups is statistically significant at p-value < .05.
18 We also carried out our analysis using a dichotomous variable OPTIM , where OPTIM =
1 if the forecast was optimistically biased, and 0 otherwise. The results are similar to the BIAS
findings. Also, FD is omitted in the ERROR and BIAS regressions. Heflin, Subramanyam, and
TABLE 4
Regression Results of the Effect of Outside Directors and Institutional Ownership on the Error and Bias
in Management’s Annual Earnings Forecasts
Forecast Accuracy Forecast Bias

Predicted Sign (Dependent Var. = ERROR) (Dependent Var. = BIAS)
Intercept ? 0.0340 0.0299
(2.085)∗∗ (1.798)∗
OUTDIR − −0.0002 −0.0002
(−2.331)∗∗∗ (−1.835)∗∗
INST − −0.0003 −0.0003
(−2.348)∗∗∗ (−2.183)∗∗∗
HORIZON + 0.0001 0.0001
(6.006)∗∗∗ (5.286)∗∗∗
LMVAL − −0.0014 −0.0018
(−1.109) (−1.352)∗
AUDIT − −0.0013 0.0028
(−0.298) (0.600)
NUMEST − 0.0000 0.0000
(−0.116) (−0.052)
DISPFOR + 1.3500 0.6284
(2.588)∗∗∗ (1.132)
LITIGATE ? −0.0006 0.0022
(−0.125) (0.447)
MKBK + −0.0006 −0.0005
(−2.089) (−1.649)
LOSS + 0.0059 0.0032
(0.640) (0.338)
EARNVOL + 0.1564 0.1351
(2.086)∗∗ (1.834)∗∗
BETA + 0.0021 0.0011
(0.658) (0.321)
SURPRISE + 0.9010 0.9882
(4.093)∗∗∗ (4.426)∗∗∗
Adjusted R 2 0.16 0.13
No. of observations 1,045 1,045
∗ ∗∗
The results in tables 3 and 4 are consistent with the argument that outside
directors foster an environment of greater disclosure transparency. Outside
directors are associated with a greater likelihood of earnings forecasts and
greater frequency of earnings forecasts as well as more accurate and con-
servative forecasts. Institutional ownership is similarly associated with dis-
closure quality. Firms with high institutional ownership are not only more
likely to issue a forecast but tend to forecast more frequently, and the fore-
casts are more specific, accurate, and conservatively biased. Although we
Zhang [2003] find that, for analysts earnings forecasts, there is no change in accuracy or bias
after Reg FD. We had initially included FD, but because of insignificant results, we decided to
exclude this variable in table 4.
view the improvements in disclosure as arising primarily from the demand

pressure generated by institutional investors, to the extent the disclosures
are in the interests of all shareholders, we see an indirect governance role
from institutional investors.
5. Additional Analyses and Robustness Checks

5.1ENDOGENEITY BETWEEN INSTITUTIONAL OWNERSHIP
AND DISCLOSURE
The positive association between institutional ownership and disclosure
can be explained in two ways. Healy, Hutton, and Palepu [1999] and Bushee
and Noe [2000] suggest that institutions prefer to buy stock in firms that
have superior disclosure. However, institutions also have incentives to en-
courage greater disclosures from companies in which they choose to invest.
This suggests that the link between institutional ownership and disclosure is
likely to be endogenous. Although ownership decisions could be influenced
by a firm’s disclosure policy, it is also reasonable that a firm’s disclosure pol-
icy is influenced by its institutional ownership. Thus, disclosure could lead
to future institutional ownership, which in turn could lead to future disclo-
sure, and so on. We examine this endogenous link between our governance
variables and the propensity to disclose by adopting (1) a Granger-type lead-
lag approach and (2) a simultaneous equation analysis. The specification of
the lead-lag regression is as follows:
OCCUR = α0 + α1 OCCURL + α2 OUTDIR + α3 INST + α4 LMVAL
+ α5 AUDIT + α6 NUMEST + α7 DISPFOR + α8 LITIGATE
+ α9 MKBK + α10 LOSS + α11 NEWS + α12 EARNVOL
+ α13 BETA + α14 FD, (6)
where:
OCCURL = OCCUR lagged one period.
In this specification, INST lags the dependent variable OCCUR. OCCURL
in turn lags INST , such that the time sequence is OCCURL → INST →
OCCUR. The purpose of this specification is to isolate the incremental ex-
planatory power of INST on future disclosure after controlling for the po-
tential effect of prior disclosure on INST .19
We also estimate a simultaneous equations system of the form:
OCCUR = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT
+ α9 LOSS + α10 NEWS + α11 EARNVOL + α12 BETA + α13 FD, (7a)
19 See Hamilton [1994, pp. 304–05] for a description of econometric tests for Granger
causality.
INST = α0 + α1 OCCUR + α2 LMVAL + α3 AUDIT + α4 NUMEST

+ α5 LITIGATE + α6 MKBK + α7 LOSS + α8 NEWS + α9 BETA
+ α10 DE + α11 YIELD + α12 LIQUIDITY + α13 SNP . (7b)
Control variables for equation (7b) are drawn from prior work, includ-
ing O’Brien and Bhushan [1990], Bushee and Noe [2000], and Bushee
[2001]. Control variables not defined earlier and used in equation (7b) are
as follows:
DE = ratio of long-term debt to stockholders equity. This vari-
able controls for the possibly negative relationship be-
tween institutional ownership and leverage.
YIELD = dividend yield for the fiscal period. This variable captures
the effect of performance based on which institutions
might make ownership decisions.
LIQUIDITY = log(trading volume/shares outstanding). This controls
for an institution’s preference for more liquid stocks.
SNP = 1 if the company is part of the S&P 500, and 0 otherwise.
This variable captures preference for S&P 500 stocks.
If institutional ownership induces disclosure, the coefficient for INST in
equation (7a) should be positive. The estimation of the system of equations
was performed by first regressing each endogenous variable on all exoge-
nous variables (instruments). In the second stage, equations (7a) and (7b)
were separately estimated with the right-side endogenous variable replaced
by its fitted value from the first-stage regression.20 In the preceding speci-
fications, the disclosure variable equals 1 if the firm issued a forecast in a
given period, and 0 otherwise. Our approach is analogous to two-stage least
squares, but not identical, because one of the equations requires a probit
analysis.
Column 3 of table 5 provides results of governance effects after control-
ling for past forecast occurrence. The coefficient of OCCURL is positive and
statistically significant at the .01 level, suggesting that past disclosure is a
good indicator of future disclosure. However, as we posited, INST contin-
ues to provide significant explanatory power, suggesting that institutional
ownership is associated with future disclosure after controlling for the corre-
lation between institutional ownership and past disclosure. The Granger test
comparing the restricted and unrestricted sum of squares residuals rejected
the null hypothesis of INST = 0 at p-value < .001.
Columns 4 and 5 of table 5 provide results of the simultaneous regression
analysis. Consistent with prior work, we find that institutional ownership is
influenced by disclosure practices (column 5, equation (7b)). More impor-
tant, and consistent with our expectations of an endogenous relationship,
20 See Maddala [1983, p. 244] for a discussion of this issue. Because OCCUR is a binary
variable, (7a) was estimated using probit both in the first and second stages.
TABLE 5
Granger Causality and Simultaneous Determination of Forecast Occurrence and Institutional Ownership
Two-Stage Least Squares

Estimation with INST Endogenous
Predicted Occurrence Regression
Sign with Lagged Occurrence (OCCUR) (INST )
Intercept ? −1.452 −2.176 50.5859
(−13.436)∗∗∗ (−18.714)∗∗∗ (29.397)∗∗∗
OCCUR + 3.4573
(3.876)∗∗∗
OCCURL + 1.193
(30.939)∗∗∗
OUTDIR + 0.002 0.002
(2.821)∗∗∗ (3.218)∗∗∗
INST + 0.006 0.022
(9.115)∗∗∗ (15.810)∗∗∗
LMVAL + 0.017 0.056 1.9234
(1.271) (4.289)∗∗∗ (6.681)∗∗∗
AUDIT + 0.033 0.009 2.1461
(0.890) (0.249) (3.929)∗∗∗
NUMEST + 0.015 0.007 0.0662
(3.774)∗∗∗ (1.966)∗∗ (1.084)
DISPFOR − −0.152 0.314
(−0.630) (1.957)
LITIGATE ? 0.188 0.174 −3.2361
(4.730)∗∗∗ (4.495)∗∗∗ (−5.048)∗∗∗
MKBK − 0.007 0.008 −0.3983
(1.979) (2.275) (−7.770)∗∗∗
LOSS − −0.389 −0.324 −4.9714
(−8.261)∗∗∗ (−7.008)∗∗∗ (−6.679)∗∗∗
NEWS − 0.005 0.008 1.8963
(0.160) (0.248) (4.046)
EARNVOL − 0.157 0.382
(0.828) (2.027)
BETA − −0.116 −0.181 −6.9689
(−4.263)∗∗∗ (−6.857)∗∗∗ (−10.914)∗∗∗
FD + 0.468 0.515
(13.279)∗∗∗ (15.296)∗∗∗
DE − 2.3118
(3.029)
YIELD − −119.5646
(−2.741)∗∗∗
LIQUIDITY + 12.8980
(30.198)∗∗∗
SNP + 1.2141
(1.590)∗
Log likelihood −5,090.60 −4,561.73
Adjusted R 2 0.32
Regressions are based on a sample of 7,745 observations. Variables are defined in the appendix. White’s
[1980] heteroskedasticity-adjusted t-values are provided in parentheses below each coefficient.
∗ ∗∗
we find that institutional ownership continues to be associated with occur-

rence of forecasts (column 4, equation (7a)) and is statistically significant
at the .01 level in this simultaneous equations setting. Outside directorship
also continues to be a significant factor in explaining forecast occurrence.
Among the control variables, LMVAL, NUMEST , LITIGATE, LOSS, BETA,
and FD are consistently effective in explaining forecast occurrence.
5.2 CHANGES SPECIFICATION

To examine the robustness of our results, we perform additional analysis
examining the association between changes in institutional ownership and
outside directors and changes in the number of earnings forecasts issued by
a company over a fiscal year. The specification is as follows:
FREQ = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT
+ α5 NUMEST + α6 DISPFOR + α7 LITIGATE
+ α8 MKBK + α9 LOSS + α10 NEWS
+ α11 EARNVOL + α12 BETA. (8)
We include both annual and quarterly forecasts for the analysis to increase
the power of our tests for the changes specification. All other variables are
as defined earlier, and the changes are measured annually. The change in
the number of forecasts issued (FREQ ) is measured for the period after the
change in institutional ownership and outside directors. The results of this
analysis are provided in table 6. The coefficient on the change in outside
directors is positive and statistically significant at the .10 level, which indi-
cates that firms that increase their outside directorships have a subsequent
increase in disclosure. The coefficient on the change in institutional own-
ership is also positive and significant (p-value < .01). Among the control
variables, changes in AUDIT and NUMEST seem to explain the change in
forecast frequency.21
5.3CONCENTRATED INSTITUTIONAL OWNERSHIP

AND THE EFFECT OF REG FD
The analysis thus far is based on the argument that institutional owners,
on average (or in the aggregate), act as outsiders relative to management.
However, prior work finds that under certain circumstances institutions be-
have like insiders. Specifically, these studies find that when ownership in a
firm is concentrated in the hands of a few institutions, these institutions are
likely to have an undue influence over management, whereby they secure
self-serving benefits that are detrimental to other capital providers (other
21 Table 6 considers all observations of changes. We performed an alternate regression where
we eliminated observations with no change in the dependent variable, and the results still held
(improved marginally).
TABLE 6
Regression Results of the Effects of Changes in Outside Directors and Institutional Ownership
on Changes in the Number of Managements’ Earnings Forecasts
Change in the Number of

Predicted Sign Forecasts (All Changes)
Intercept ? 0.0815
(7.654)∗∗∗
OUTDIR + 0.0007
(1.433)∗
INST + 0.0017
(3.714)∗∗∗
LMVAL + 0.1853
(8.510)∗∗∗
AUDIT + 0.1431
(2.905)∗∗∗
NUMEST + 0.0399
(9.422)∗∗
DISPFOR − −0.0405
(−0.561)
LITIGATE ? −0.1372
(−1.242)
MKBK − −0.0013
(−2.109)∗∗
LOSS − −0.0060
(−0.199)
NEWS − 0.0108
(0.714)
EARNVOL + −0.0085
(−0.041)
BETA − 0.0950
(3.237)
No. of observations 6,571
Adjusted R 2 0.04
The dependent variable represents the change in the number of earnings forecasts made by the firm
during a fiscal year (change is calculated as the difference over two consecutive fiscal periods). All other
variables are as defined in the appendix except that each variable represents changes over two consecutive
fiscal years. White’s [1980] heteroskedasticity-adjusted t-values are provided in parentheses below each
coefficient.
∗ ∗∗
shareholders and bondholders).22 These concentrated (or blockholder)

institutions often have better access to private information (Porter [1992])
and consequently may not press the firms for public disclosures. Some may
actively prefer fewer forecasts or forecasts of lower quality, thereby giving
them an advantage relative to the market. Effectively, concentrated owner-
ship can be seen as analogous to insiders. In such a case, voluntary public
22 This is called the private benefits hypothesis. Consistent with this argument, Bhojraj and
Sengupta [2003] find that bond yields (ratings) are negatively (positively) associated with in-
stitutional ownership but positively (negatively) associated with ownership concentration. See
Barclay and Holderness [1992] for a discussion of the private benefits and the shared bene-
fits hypotheses. Other studies examining the benefits of large blockholders include Huddart
[1993] and Maug [1998].
disclosure may suffer and thus would lessen the quality of management fore-
casts. We choose two alternate proxies for concentrated ownership vis-à-vis
institutional incentives:23
INST5 = percentage of company’s common stock held by the five
largest institutional owners of the firm
INSTCONS = Herfindahl index of institutional ownership concentra-
tion, measured as:
N
shares held by institution i 2
.
i=1
total shares outstanding
The argument that concentrated institutions may discourage frequent dis-

closures rests on the assumption that these institutions have access to private
information from the firms. In October 2000, Reg FD was introduced, which
prohibited firms from privately disclosing information to select audiences.
The regulation was intended to level the playing field among individuals,
analysts, and institutional investors through enhanced and simultaneous
public disclosure of information. If Reg FD indeed increased the cost of pri-
vate information transfer from firms to favored audiences, which includes
large and concentrated institutional owners, we would expect concentrated
institutional ownership to have a less negative or dampening effect on dis-
closure (or zero effect if Reg FD was completely effective) in the post–Reg
FD period. We examine this issue by including an additional explanatory
variable that interacts the concentrated institutional ownership variable with
the FD variable.
Table 7 provides the results of including FD (a dummy variable that
equals 1 for the post–Reg FD years 2001 and 2002, and 0 otherwise), INST5
or INSTCONS, and the interaction of either of these two concentrated insti-
tutional ownership measures with FD in our occurrence regressions. Several
observations can be made from the results. First, the coefficients for INST5
and INSTCONS both turn out to be negative and statistically significant at
the .01 level as expected, suggesting that the probability of issuing a forecast
is lower when institutional ownership is highly concentrated (similar results
were obtained when we performed the regressions without the interaction
terms).24 The interaction terms INST5 ∗ FD and INSTCONS ∗ FD, however,
23 Similar variables are used in the prior literature (e.g., Brickley, Lease, and Smith [1988],
Agrawal and Mandelker [1990], Baysinger, Kosnik, and Turk [1991]). Bushee [1998] and
Bushee and Noe [2000] devise a compound partition that combines private benefits and invest-
ment horizons whereby institutions are separated into three classes: dedicated, quasi-indexers,
and transient. As an alternative to our two measures, we conducted a separate analysis using
Bushee’s three-way classification. The results of this separate analysis (not reported) showed
that firms with a larger fraction of shares held by dedicated institutions were less likely to is-
sue earnings forecasts. This is consistent with the results we report based on our measures of
institutional ownership concentration.
24 Similar results are found for the specificity (SPECIFIC) regression (i.e., higher institutional
concentration leads to forecasts of lower precision). However, the concentrated institutional

ownership variables are not significant in explaining forecast error (ERROR) and bias (BIAS).
TABLE 7
Regression Results of the Effect of the Nature of Institutional Ownership on the Probability of Occurrence
of an Earnings Forecast and the Differential Impact of Such Ownership in the Pre– and Post–Regulation
Fair Disclosure Periods
Predicted Sign Model 1 Model 2
Intercept ? −1.3655 −1.5640
(−11.786)∗∗∗ (−14.998)∗∗∗
OUTDIR + 0.0030 0.0030
(3.981)∗∗∗ (3.997)∗∗∗
INST + 0.0122 0.0098
(11.943)∗∗∗ (14.190)∗∗∗
INST5 − −0.0117
(−4.759)∗∗∗
INSTCONS − −2.5722
(−6.812)∗∗∗
INST5 ∗ FD + 0.0041
(1.461)∗
INSTCONS ∗ FD + 0.9921
(1.531)∗
LMVAL + 0.0290 0.0442
(2.150)∗∗ (3.424)∗∗∗
AUDIT + 0.0343 0.0364
(0.973) (1.032)
NUMEST + 0.0190 0.0190
(5.245)∗∗∗ (5.260)∗∗∗
DISPFOR − −0.0416 −0.0332
(−0.251) (−0.199)
LITIGATE ? 0.1880 0.1868
(4.873)∗∗∗ (4.846)∗∗∗
MKBK − 0.0051 0.0050
(1.529) (1.509)
LOSS − −0.4011 −0.4100
(−8.794)∗∗∗ (−9.026)∗∗∗
NEWS − 0.0180 0.0189
(0.577) (0.604)
EARNVOL − 0.1596 0.1603
(0.846) (0.855)
BETA − −0.1565 −0.1553
(−5.949)∗∗∗ (−5.912)∗∗∗
FD + 0.4894 0.5669
(6.448)∗∗∗ (15.452)∗∗∗
Log likelihood −4,596.66 −4,598.07
No. of observations 7,745 7,745
∗ ∗∗
turn out to be positive and statistically significant at the .1 level, indicating

that the effect of the concentrated institutional ownership is less negative in
A possible explanation for this latter result is that once the decision to disclose is made, the
concentrated institutional owners may not want the information to be biased or erroneous for
litigation reasons.
the post–Reg FD period than in the pre–Reg FD period. Additional tests

reveal that in the post–Reg FD environment, the marginal impact of con-
centrated ownership remains negative and significant (p-value = .01). These
results suggest that Reg FD has been partially effective in reducing private in-
formation communication, although institutions seem to continue deriving
private information benefits, even in the post–Reg FD era. This is consistent
with an Institutional Investor [2001] survey of approximately 1,600 CFOs that
finds that although almost 57% of CFOs had private conversations with an-
alysts in the pre–Reg FD environment, only 37% continue to do so in the
post–Reg FD environment.
We carry out additional analysis to explore differences in the association
between institutional ownership, outside directors, and forecasts disclosure.
Untabulated results indicate that there is no significant shift in coefficient
values of INST and OUTDIR across the two regimes.
5.4 FIRM CHARACTERISTICS AND OUTSIDE DIRECTORS

One possible explanation for the results relating to OUTDIR is that the
proportion of outside directors is related to underlying firm characteristics,
which could also be related to disclosure. However, there is little prior work
relating firm characteristics to board composition. Denis and Sarin [1999]
find that the proportion of outside directors is related to the size of firm,
size of the board, and the industry median ratio of market to book value. We
therefore carry out a two-stage analysis where we initially regress OUTDIR
on these characteristics. The error term from this regression represents the
portion of OUTDIR not explained by the firm characteristics identified in the
prior literature. In the second stage, we regress OCCUR on the error term
from the first-stage regression and control variables. Untabulated results
from this analysis find that the error term is significant in explaining OCCUR,
suggesting that OUTDIR continues to be significant after controlling for
known underlying firm characteristics that affect OUTDIR.
It is also possible that the proportion of outside directors is the result
of greater investor oversight that is also the source of greater disclosure.
To examine this possibility, we carry out a simultaneous equation analy-
sis with a system of three equations where OCCUR, INST , and OUTDIR
are endogenous.25 We include several variables that proxy for investor
oversight in the OUTDIR regression, including analyst following, indus-
try dummy, size, and institutional ownership. OUTDIR continues to be sig-
nificant in explaining OCCUR in this specification. Although this suggests
that outside directors are associated with disclosure beyond that accounted
for by proxies of investor oversight, we cannot rule out this alternative
explanation.
25 See the excellent survey paper on boards of directors and endogeneity by Hermalin and
Weisbach [2003].
5.5 ENDOGENEITY BETWEEN INST AND NUMEST

O’Brien and Bhushan [1990] document a simultaneous relationship be-
tween INST and NUMEST . It is therefore possible that the results for INST
could be due to the underlying influence of NUMEST on INST . We attempt
to control for this possibility in two ways. First, we carry out a simultaneous
equation analysis with a system of three equations where OCCUR, INST ,
and NUMEST are endogenous. INST continues to be a significant explana-
tory variable of OCCUR in this specification. Second, we carry out a two-
stage analysis similar to the previous OUTDIR analysis. In the first stage we
regress INST on NUMEST and other control variables. In the second stage
we regress OCCUR on the error term from the first regression and on con-
trol variables. The error term is significant in explaining OCCUR, suggest-
ing that INST continues to be significant after controlling for the effect of
NUMEST .
5.6 ANALYSES USING QUARTERLY FORECASTS

The analyses and results so far are based on annual forecasts. Separate
analyses are also carried out using a sample of quarterly forecasts. Un-
tabulated results find that our corporate governance variables continue to
be significant in their association with forecast occurrence and frequency.
These results continue to hold after carrying out the simultaneous equation
analysis and other robustness checks detailed in the previous subsections.
As with the annual forecasts, institutional ownership is also significant in ex-
plaining the specificity of management forecasts. Furthermore, institutional
ownership is positively associated with more accurate and more conserva-
tive forecasts. However, unlike the annual forecast sample results, outside
directors are not significant in explaining forecast error and bias. The re-
sults of the quarterly analyses are subject to the following limitation. Our
analysis is carried out using annual governance measures. To the extent
that quarterly changes in governance variables influence quarterly disclo-
sure, the power of our tests would be compromised. The quarterly error and
bias regressions tend to have lower power (compared with those based on
annual forecasts reported in table 4), with some control variables turning
insignificant in these regressions. This could be attributable to a structural
difference in the error and bias of quarterly and annual forecasts that might
merit separate investigation.
5.7 OTHER ROBUSTNESS CHECKS

We carry out additional analyses using the number of outside directors
as an alternate proxy for outside directorship. The results are qualitatively
similar to those using the proportion of outside directors. Finally, we carry
out a simultaneous equation analysis with a system of four regressions where
OCCUR, INST , OUTDIR, and NUMEST are the endogenous variables. INST
and OUTDIR continue to be significantly associated with OCCUR.
Regression diagnostics revealed that multicollinearity was not a se-

vere problem in the individual regressions because the condition num-
bers in the regressions did not exceed 50 (see Belsley, Kuh, and Welsch
[1980]). We identified a few influential observations in our samples and
examined the robustness of our results to these influential observations
by eliminating the influential observations. The results are essentially
unchanged.
6. Summary and Conclusions

The focus of this study is to investigate the relation between a set of gover-
nance mechanisms and voluntary disclosure, surrogated by the properties
of management earnings forecasts. Specifically, we examine the association
between governance proxies (outside directors and institutional investors)
and the occurrence, frequency, specificity (i.e., precision), accuracy, and bias
of earnings forecasts disclosed by firm managers. Using a sample spanning
from 1997 to 2002, we find that institutional ownership and the proportion
of outside directors are favorably associated with the likelihood of forecast
occurrence and frequency of forecast issuance. The evidence also indicates
that the forecasts issued are more specific and accurate. In addition, gov-
ernance mechanisms are negatively associated with managerial optimism;
that is, firms with greater institutional ownership and percentage of outside
directors are likely to issue less optimistically biased (or more conservative)
forecasts. Subsample analysis indicates that the coefficients on outside direc-
tors and institutional ownership are not significantly different in the pre–
and post–Reg FD eras.
Additional analysis suggests that concentrated institutional ownership is
negatively associated with forecast properties. The association is less negative
in the post–Reg FD environment, which is consistent with Reg FD reducing
the ability of firms to privately communicate information to select audiences.
This finding is also consistent with survey data that document a reduction,
but not elimination, of private communication between CFOs and analysts
in the post–Reg FD era.
This article contributes to the literature on discretionary disclosure and
on corporate governance. We find that the monitoring mechanisms are
related to the extent and quality of discretionary information a manager
discloses. These results are interesting given the current scrutiny of corpo-
rate governance mechanisms and the state of the financial reporting sys-
tem. Recent financial bankruptcies have led to a greater focus on the need
for stronger governance and more transparent disclosure. Our results sug-
gest that the two are linked and that promoting stronger governance could
also promote more transparent disclosure. This article also contributes to
the literature on the effectiveness of governance variables by focusing on
a firm attribute—information disclosure environment—that is novel to the
literature.
APPENDIX
Variable Definitions
OCCUR = 1 if the firm made an earnings forecast during a fiscal
period, and 0 otherwise
OCCURL = 1 if the firm made an earnings forecast during fiscal pe-
riod t–1, and 0 otherwise
FREQ = number of management forecasts made by a firm from
1997 to 2000
SPECIFIC = 3 if the company made a point forecast, 2 for a closed-
interval forecast, 1 for an open-interval forecast, and 0
for other kinds of forecasts
ERROR = absolute value [management’s forecasted EPS − actual
EPS]/price at the beginning of the fiscal period
BIAS = [management’s forecasted EPS − actual EPS]/price at
the beginning of the fiscal period
INST = percentage of common shares held by institutions
INSTCONS = Herfindahl index of concentration of institutional own-
ership measured as:
N
shares held by institution i 2
i=1
total shares outstanding
OUTDIR = percentage of the board of directors who are not officers
of the firm
HORIZON = number of days between the forecast date and the fiscal
period end date
SURPRISE = absolute value [management’s forecasted EPS − median
analysts’ forecasted EPS]/price at the beginning of the
fiscal period
LMVAL = natural log of the market value of a firm’s common equity
(in $ millions) at the beginning of the fiscal period
AUDIT = 1 if the auditor is one of the Big 5 (previously Big 8)
auditors, and 0 otherwise
NUMEST = number of analysts following the firm. For tests of occur-
rence and frequency, this is based on the last-available an-
alyst forecast information in First Call before fiscal period-
end. For tests of specificity, accuracy, and bias, this is based
on the last-available analyst forecast information in First
Call before the management forecast.
DISPFOR = standard deviation of analyst forecasts divided by median
forecast. For tests of occurrence and frequency, this is
based on the last-available analyst forecast information in
First Call before fiscal period-end. For tests of specificity,
accuracy, and bias, this is based on the last-available analyst
forecast information in First Call before the management
forecast.
LITIGATE = 1 if the firm belongs to the biotechnology (SIC codes

2833–2836), R&D services (8731–8734), programming
(7371–7379), computers (3570–3577), electronics (3600–
3674), or retailing (5200–5961) industry, and 0 otherwise
MKBK = market value of equity divided by the book value of equity
at the beginning of the fiscal period
LOSS = 1 if the firm reported losses in the current period, and 0
otherwise
NEWS = 1 if the current-period EPS is greater than or equal to the
previous-period EPS, and 0 otherwise
EARNVOL = standard deviation of quarterly earnings before extraor-
dinary items for the 12 quarters before the current fiscal
year, divided by median assets over the 12 quarters
DE = long-term debt/total stockholders’ equity at the begin-
ning of the fiscal period
YIELD = dividend yield for the fiscal period
BETA = equity beta for the fiscal year
LIQUIDITY = log(trading volume/shares outstanding) for the fiscal
year
SNP = 1 if the company was part of the S&P 500, and 0 otherwise
FD = 1 if the observation is related to the post–Regulation
Fair Disclosure period (after October 2000), and 0
otherwise
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DOI: 10.1111/j.1475-679X.2005.00174.

The Association between Outside

Received 27 May 2003; accepted 20 September 2004

We investigate the relation of the board of directors and institutional own-

∗ University of Florida; †Cornell University; ‡University of Maryland. We thank Kate Camp-

governance literature in finance and accounting.

is less negative in the post–Reg FD era, which is consistent with Reg FD

2. Outside Directors, Institutional Owners,

constrained by the costs of disclosure (including proprietary and litigation costs).

directors (presumably more independent and effective members) should

10 We performed a small-sample test of the comprehensiveness of the CIG database. We picked

but before the actual earnings announcements.

post–Reg FD periods. To reduce further problems of data interdependence,

BIAS = [(management forecast of EPS − actual EPS)/price at the

yielded results that are similar to those reported with OUTDIR.

0 otherwise (based on Francis, Philbrick, and Schipper

EARNVOL = standard deviation of quarterly earnings over 12 quarters

3.2.4. Regression Specifications. The specifications of the various regres-

FREQ = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT

SPECIFIC = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT

ERROR = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT

BIAS = α0 + α1 OUTDIR + α2 INST + α3 LMVAL + α4 AUDIT + α5 NUMEST

Because the dependent variable, OCCUR, is a binary variable, we estimate

Variables Mean Std. Dev. Median 25% 75%

Panel B: Control groupc

indicate that the coefficient on OUTDIR is positive and significant at the

Forecast Occurrence Forecast Frequency Forecast Specificity

17 We conducted additional analysis to check whether our conjecture is valid. We tabulated

Forecast Accuracy Forecast Bias

view the improvements in disclosure as arising primarily from the demand

5. Additional Analyses and Robustness Checks

INST = α0 + α1 OCCUR + α2 LMVAL + α3 AUDIT + α4 NUMEST

Two-Stage Least Squares

we find that institutional ownership continues to be associated with occur-

5.2 CHANGES SPECIFICATION

5.3CONCENTRATED INSTITUTIONAL OWNERSHIP

21 Table 6 considers all observations of changes. We performed an alternate regression where

Change in the Number of

shareholders and bondholders).22 These concentrated (or blockholder)

The argument that concentrated institutions may discourage frequent dis-

concentration leads to forecasts of lower precision). However, the concentrated institutional

turn out to be positive and statistically significant at the .1 level, indicating

the post–Reg FD period than in the pre–Reg FD period. Additional tests

5.4 FIRM CHARACTERISTICS AND OUTSIDE DIRECTORS

5.5 ENDOGENEITY BETWEEN INST AND NUMEST

5.6 ANALYSES USING QUARTERLY FORECASTS

5.7 OTHER ROBUSTNESS CHECKS

Regression diagnostics revealed that multicollinearity was not a se-

6. Summary and Conclusions

LITIGATE = 1 if the firm belongs to the biotechnology (SIC codes

HEALY, P. M.; A. P. HUTTON; AND K. G. PALEPU. “Stock Performance and Intermediation

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