Creditors’ Rights and Management Forecast Decisions: Evidence from a Quasi-Natural Experiment

Abstract

I study how creditors’ rights affect management’s disclosure decisions, employing the introduction of anti-recharacterization laws in the United States as an exogenous shock to creditors’ rights. These laws increased the rights of creditors by enhancing their ability to repossess collateral pledged for secured lending. I find that after the enactment of the laws, managers were more likely to issue a forecast and the number of forecasts increased. However, there is no evidence to suggest that management sacrifices forecast quality in the process. Further tests reveal that the response is stronger for companies with higher levels of shareholder monitoring, implying an indirect effect of creditors’ rights as a governance mechanism.