An Empirical Examination of Horizon: Evidence from the Term Structure of Implied Equity Volatilities

Abstract

We develop and test measures of the horizon of firm uncertainty and of the horizon of managers' corporate disclosures. The measures exploit information in the term structure of implied equity volatilities to gauge the relative extent to which the information underlying securities prices reflects long-term versus short-term uncertainty. We find that the horizon of firm uncertainty measure is associated with variables that are likely to capture the extent to which firms' business models result in differing degrees of uncertainty about the long-term versus the short-term. The horizon of managers' corporate disclosures measure allows us to characterize managers' disclosures in terms of whether they provide information about long-term business strategies or are more oriented towards short-term operating results. We find that earnings announcements containing management forecasts have shorter disclosure horizons than earnings announcements not containing management forecasts.