Management Earnings Guidance and Stock Price Crash Risk
Sophia J. W. Hamm
Ohio State University (OSU) - Fisher College of Business
Edward Xuejun Li
City University of New York (CUNY) - Stan Ross Department of Accountancy
Singapore Management University - School of Accountancy
September 28, 2015
Singapore Management University School of Accountancy Research Paper No. 2014-10
A burgeoning literature explores the link between the quality of corporate disclosure and stock price crash risk. Much of the evidence, however, relies on the quality of mandatory financial reports, which are not the primary sources of timely new information. Our study fills this gap by examining the relation between more timely management earnings guidance and crash risk. Our findings are twofold. First, the previously documented effects of various mandatory reporting qualities on crash risk either weaken or disappear when they are considered conjointly with guidance. Second, contrary to the conventional wisdom that firms issue guidance to avoid significant price drops, we show that guidance firms, on average, have a higher future crash risk. Further analyses attribute this result to an agency problem inherent to guidance disclosure where managers with career concerns have incentives to issue upward-biased forecasts to disguise business declines in hope of a future revival. We have performed a battery of tests to mitigate the concerns about endogeneity and alternative explanations. Our evidence highlights the agency problem with guidance disclosure and its impact on capital markets beyond the short horizon.
Number of Pages in PDF File: 53
Keywords: crash risk, management earnings guidance, agency problem, opacity
JEL Classification: G14, M41, M43
Date posted: May 9, 2012 ; Last revised: September 29, 2015
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