On guidance and volatility
Survey evidence suggests that managers voluntarily disclose information, particularly earnings guidance, with an aim toward dampening share price volatility. Yet, consultants and influential institutions advise against providing guidance citing fears of litigation and market penalties associated with missed earnings targets, as well as a lack of evidence that disclosure actually curbs volatility. Furthermore, recent research links guidance to increased volatility and heightened crash risk. Hence, many argue that guidance not only fails to promote tranquility but may actually prompt turbulence. In this paper, we consider the interplay between guidance and volatility. Consistent with the notion that volatility does indeed factor into managers decisions to supply earnings guidance, we provide evidence of a link between increased volatility and the likelihood that a manager chooses to bundle a forecast with the firms earnings announcement in the current quarter. In particular, our findings indicate that firms in more volatile information environments exhibit a general reticence to offer guidance, but given a recent spike in volatility, managers are more likely to jump in with a forecast seemingly in an effort to calm the market. Subsequent tests indicate that managers efforts do not go unrewarded, as we document a greater post-announcement run-down in volatility for guiding firms. Taken collectively, this evidence supports the view that managers can and do positively shape their firms information environments by an earnings guidance.
|Date of creation:||2013|
|Date of revision:|
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- Brian Bushee, 2004. "Identifying and Attracting the "right" Investors: Evidence on the Behavior of Institutional Investors," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(4), pages 28-35.
- Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014.
"Shaping Liquidity: On the Causal Effects of Voluntary Disclosure,"
Journal of Finance,
American Finance Association, vol. 69(5), pages 2237-2278, October.
- Karthik Balakrishnan & Mary B. Billings & Bryan T. Kelly & Alexander Ljungqvist, 2013. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," NBER Working Papers 18984, National Bureau of Economic Research, Inc.
- Rogers, Jonathan L. & Skinner, Douglas J. & Van Buskirk, Andrew, 2009. "Earnings guidance and market uncertainty," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 90-109, October.
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