Management Forecasts, Idiosyncratic Risk, and Information Environment
Studies have identified an increase in the level of average stock return volatility. In this paper, we use the management forecast error as a proxy for disclosure quality to investigate the relationship between management forecast errors and idiosyncratic risk, as management forecasts are important information source on the Japanese stock market. We find that management forecast error is positively related to idiosyncratic risk, suggesting that high-quality public information reduces idiosyncratic risk. Furthermore, we present evidence that management forecast error is even more positively related to the idiosyncratic risks in relatively bad information environments.