Informational Endowment, Sophisticated Skepticism and Management Earnings Forecasts

While sophisticated skepticism promotes voluntary disclosure, various frictions serve to defeat it. One of the simplest frictions is rational investor uncertainty about management's endowment of information (UEI). Sophisticated skepticism will increase as the likelihood that management is withholding value-relevant negative information increases, causing managers to voluntarily disclose increasingly unfavorable information in order to avoid the investors' larger discounts. Based on previous research, we argue that the quality of management's information improves with customer concentration. Accordingly, we find that the precision of, and investors' reactions to, management forecasts increase for suppliers with more concentrated customer bases. Moreover, as the UEI model implies, firms with major customers are more likely to issue management forecasts preceding sales contractions (bad news) and the difference between the forecast disclosure frequency preceding sales expansions versus sales contractions decreases with both customer concentration and value relevance of the information possessed by management