Causes and Consequences of Disaggregating Earnings Guidance
Journal of Business, Finance and Accounting, 2013, Vol. 40 (1)&(2): 26-54
49 Pages Posted: 13 Sep 2007 Last revised: 24 Mar 2019
Date Written: October 24, 2012
Whether managers should provide earnings guidance, especially quarterly guidance, has been a hotly debated policy issue. Influential organizations have urged firms to stop providing earnings guidance to reduce earnings fixation and short-termism in the capital markets. Little attention has been paid to an alternative proposal: instead of ceasing earnings guidance, companies could provide disaggregated earnings guidance. No archival evidence exists regarding the determinants of disaggregated earnings guidance and its effects on the firm and its information environment. We find that once managers provide guidance, the decision to disaggregate this guidance is primarily driven by demand-and-supply factors that exhibit little change from year to year rather than by opportunistic factors. We find more timely analyst forecast revisions (with no compromise of forecast accuracy), a greater magnitude of revisions, and a larger reduction in analyst disagreement for disaggregating firms than for non-disaggregating firms. These findings suggest that disaggregation enriches a firm’s information environment. We also find that disaggregation helps managers align analyst expectations with their own, but firms are punished by investors for providing multiple performance targets but missing them.
Keywords: management earnings forecast, earnings guidance, disaggregated earnings, voluntary disclosure
JEL Classification: M41, M45, G32, G29
Suggested Citation: Suggested Citation