MANAGEMENT FORECAST AND RISK PARAMETER UNCERTAINTY

Abstract

We investigate the impact of management voluntary disclosure on investors? uncertainty in estimating the risk parameter. Prior theoretical work shows that increasing the number of observations related to the cash flow generating process can reduce investors? uncertainty in estimating the risk parameter (Barry and Brown 1985). Using variance of beta as our proxy for risk parameter uncertainty, we find that risk parameter uncertainty decreases in management forecast frequency and management forecast quality. This effect is more pronounced for firms in worse information environments, firms with higher business uncertainty, firms with younger age, firms with more reliable management guidance, and for periods after the enactment of Regulation FD. Overall, our findings support prior studies proposing that additional information of higher quality reduces estimation risk and suggest that voluntary disclosure is an important determinant of risk parameter uncertainty.