Information or Noise? Examining the Effect of Discretionary Disclosure of Accounting Estimates on Financial Analyst Forecasts

Whether discretionary disclosure of accounting estimates increases or decreases the decision usefulness of financial information is a fundamental issue in accounting and finance. Our paper speaks to this issue by examining the effect of discretionary disclosure of accounting estimates on the forecasting behaviour of financial analysts, who are sophisticated users of financial information and play a crucial role as an information intermediary in the capital markets. We find that discretionary disclosure of accounting estimates (made in the 10‐K management discussion and analysis and financial statement footnotes) reduces analyst forecast errors and analysts’ tendency to round their annual earnings forecasts. These effects are more pronounced when analysts issue forecasts for companies with high accounting reporting complexity. Overall, the results suggest that discretionary disclosure of accounting estimates reduces information costs by providing relevant information for analysts’ forecasting decisions.