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Abstract:
Firms enjoy a wide degree of discretion in their disclosure of events in the patent granting process, which investors generally view as "good news" announcements. This study examines the timing of patent disclosure in conjunction with earnings announcements in light of managers' incentives to avoid the stock price-related consequences of earnings disappointments. Among a sample of firms making voluntary patent disclosures, the results suggest that the likelihood of disclosing a patent before a "bad news" earnings announcement increases in the magnitude of the negative earnings surprise. Further, such strategic patent disclosure appears to successfully dampen the market response to the earnings disappointment. Overall, the empirical findings suggest that some firms strategically time the voluntary disclosure of patent-related information in order to manage their short-term stock prices before an adverse information event.
Voluntary Disclosure, Patents, Negative Earnings Surprises
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Benjamin Lansford
Northwestern University - Kellogg School of Management Baruch Itamar Lev
New York University - Stern School of Business Jenny Tucker
University of Florida - Warrington College of Business Administration
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13 Sep 07
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Last Revised:
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30 Sep 09
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Abstract:
We identify in this study the determinants of firms' decision to provide disaggregated earnings guidance (i.e., earnings, revenue, and specific expense forecasts), and the consequences of such disclosure practice. Almost a quarter of the S&P 500 firms provide disaggregated earnings guidance. We document that the guidance disaggregation decision is primarily driven by demand factors: relatively low decision-usefulness of earnings, analysts' difficulties in predicting earnings, high institutional ownership, and high decision-usefulness of revenue. Interestingly, we do not find evidence consistent with opportunistic management motives in guidance disaggregation. As for the consequences of guidance disaggregation, we document that this information allows analysts to quickly revise earnings estimates, and results in lower dispersion of the estimates. Furthermore, guidance disaggregation improves the likelihood of firms to meet or beat analysts' estimates. Finally, we document some of the costs of disaggregating guidance, explaining why many firms do not practice such disclosure.
management earnings forecast, earnings guidance, disaggregated earnings, voluntary disclosure
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