Causes and Consequences of Disaggregating Earnings Guidance

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.

Keywords: management earnings forecast, earnings guidance, disaggregated earnings, voluntary disclosure

JEL Classifications: M41, M45, G32, G29

Working Paper Series