The Genesis of Voluntary Disclosure: An Analysis of Firms’ First Earnings Guidance

We investigate a firm’s decision to initiate earnings guidance during its first year as a public company following its initial public offering (IPO), which we label “early guidance.” Using a sample of firms with IPOs between 2001 and 2010, we find that almost 60% provide early guidance and that only one-third of the firms that do not provide guidance during the first year subsequently decide to guide. Consistent with the importance of liquidity incentives following the IPO, we find that firms are significantly more likely to provide early guidance when their IPOs are backed by venture capital or private equity investors. Our results indicate that firms with higher-quality IPO information are more likely to provide early earnings guidance. We also find that early guidance has significant implications for future disclosure choices. Firms that guide soon after the IPO are significantly more likely to guide again and to provide regular future guidance (i.e., they establish a regular guidance policy). Finally, we find evidence suggesting that the credibility of initial guidance is lower than that of subsequent guidance, and subsequent guidance credibility relates to both the length of firms’ guidance history and the accuracy of their initial guidance disclosures. This paper was accepted by Shiva Rajgopal, accounting.