Credibility of Prospective Information under IFRS

While the notion of more disclosure of prospective information is increasingly embraced by the international financial community and the International Accounting Standards Board (IASB), accounting researchers are still debating the credibility of such disclosures. Management disclosure of prospective information is considered costless signaling because such disclosure can be made with little or no cost. Existing literature generally questions the credibility of costless signaling. This study presents a model of a non-cooperatively supported signaling equilibrium. At equilibrium, the international financial community correctly anticipates that firms will disclose prospective information honestly, and reacts to the disclosed information as if it truthfully reflects management private knowledge. The analysis has direct policy implications in that it supports IASB’s efforts in several of its new International Financial Reporting Standards (IFRS) which require more disclosure of prospective information as a means to satisfy the growing information needs of the global financial community.