The Impact of Earnings Guidance Cessation on Information Asymmetry

Hu, Bill X.; Hwang, Joon Ho; Jiang, Christine X.

doi:10.1111/jbfa.12061

Cited by 15 publications

(11 citation statements)

References 78 publications

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“…The evidence inChoi et al (2011) is also consistent withHouston et al (2010) andChen et al (2011), who show that information transparency and disclosure quality deteriorate for firms that cease to issue quarterly earnings guidance. In contrast,Hu, Hwang, and Jiang (2012) find that, upon cessation of quarterly guidance, information asymmetry decreases more for firms that issued guidance in at least three quarters of the previous year than for firms that issued guidance in less than three quarters in the previous year.…”

contrasting

confidence: 58%

Short-term earnings guidance and accrual-based earnings management

et al. 2014

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Motivated by recent practitioners' concerns that short-term earnings guidance leads to managerial myopia, we investigate the impact of short-term earnings guidance on earnings management. Using a propensity-score matched control sample, we find strong and consistent evidence that the issuance of short-term quarterly earnings guidance is associated with less, rather than more, earnings management. We also find that regular guiders exhibit less earnings management than do less regular guiders. Our findings hold using both abnormal accruals and discretionary revenues to measure earnings management and after controlling for potential reverse causality concerns. Furthermore, in a setting where managers have particularly strong capital market incentives to manage earnings, we corroborate these findings by documenting that earnings guidance either has no impact on or mitigates earnings management. Overall, our evidence does not support the criticism from practitioners that short-term earnings guidance leads to more earnings management.

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contrasting

confidence: 58%

Short-term earnings guidance and accrual-based earnings management

et al. 2014

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“…Instead, they find a decrease in analyst coverage and increases in analyst earnings forecast errors and forecast dispersion following guidance cessation. Hu et al (2014), in contrast, show that information asymmetry decreases significantly for guidance stoppers relative to matched nonguiders and guidance maintainers.6…”

Section: Costs and Benefits Of Management Guidancementioning

confidence: 94%

Does the cessation of quarterly earnings guidance reduce investors’ short-termism?

Kim

Zhu

2017

Rev Account Stud

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The practice of providing quarterly earnings guidance has been criticized for encouraging investors to fixate on short-term earnings and encouraging managerial myopia. Using data from the post-Regulation Fair Disclosure period, we examine whether the cessation of quarterly earnings guidance reduces short-termism among investors. We show that, after guidance cessation, investors in firms that stop quarterly guidance are composed of a larger (smaller) proportion of long-term (short-term) institutions, put more (less) weight on long-term (short-term) earnings in firm valuation, become more (less) sensitive to analysts' long-term (short-term) earning forecast revisions, and are less likely to dismiss chief executive officers for missing quarterly earnings targets by small amounts, relative to investors in firms that continue to issue quarterly earnings guidance. Our study provides new evidence of the benefit of stopping quarterly earnings guidance, that is, the reduction of short-termism among investors.

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“…The occurrence of forecasts refers to the status of forecast issuance. Where Hu et al () find less earnings management after firms cease issuing earnings guidance, we examine whether potential earnings management as evidenced by a restatement is associated with the managerial decision to issue or not issue earnings guidance. Precision of forecasts refers to the form of the forecast issued.…”

Section: Additional Analyses and Robustness Testsmentioning

confidence: 99%

Management Guidance Pre‐ and Post‐Restatement

Gordon¹,

Henry²,

Li³

et al. 2014

Business Fin & Account

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We examine whether the quality of restating firms’ management guidance differs in periods before and after restatement announcements. While characteristics of restating firms and the consequences of restatement have been a central topic in accounting and auditing research, the quality of management guidance around restatements is less well understood. We consider two competing characterizations of the link between management forecast accuracy and bias and restatement (an event that tends to signal poor financial controls): “Forecast–Opportunism Explanation” and “Forecast–Ability Explanation”. Under the Forecast–Opportunism Explanation, pre‐restatement weaknesses in financial controls enable managers to manipulate earnings toward forecasts and to meet or exceed opportunistically biased forecasts, and the post‐restatement strengthening of financial controls constrains opportunistic behavior. Under the Forecast–Ability Explanation, pre‐restatement weaknesses in financial controls impede managers’ ability to issue accurate forecasts, and post‐restatement improvements remove impediments so that the accuracy of forecasts improves; forecast bias remains unaffected. Evidence indicates that before a restatement, restating firms’ forecasts are more accurate and relatively more downwardly biased than control firms’ forecasts. Post‐restatement, restating firms have less accurate and less downwardly biased management guidance. Our overall results are consistent with the Forecast–Opportunism Explanation.

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The Impact of Earnings Guidance Cessation on Information Asymmetry

Cited by 15 publications

References 78 publications

Short-term earnings guidance and accrual-based earnings management

Short-term earnings guidance and accrual-based earnings management

Does the cessation of quarterly earnings guidance reduce investors’ short-termism?

Management Guidance Pre‐ and Post‐Restatement

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