The Impact of Earnings Guidance Cessation on Information Asymmetry

Posted: 26 Aug 2009 Last revised: 17 Apr 2012

See all articles by Xiankui Hu

Xiankui Hu

Arkansas State University - College of Business

Joon Ho Hwang

Korea University

Christine X. Jiang

Fudan University

Date Written: March 25, 2012

Abstract

The practice of U.S. public companies issuing quarterly earnings guidance is coming under increased scrutiny and criticism. We test two competing hypotheses on whether information asymmetry will increase or decrease after quarterly earnings guidance cessation. The first hypothesis, “information transparency” hypothesis, states that information asymmetry increases after earnings guidance cessation because less information is provided to the market. The second hypothesis, “numbers game” hypothesis, states that information asymmetry decreases after earnings guidance cessation because managers no longer need to manage earnings to meet or beat their own targets and thus decrease information asymmetry. Using a large sample of firms during the years 2002-2011, we find that earnings guidance cessation significantly reduces information asymmetry for persistent guiders but not for occasional guiders. The information asymmetry reductions are positively related to the measure of earnings management before guidance cessation for persistent guiders. Thus our empirical results support the “numbers game” hypothesis. The study suggests that the reductions in information asymmetry are driven, at least in part, by firms engaging in less earnings management after guidance cessation.

Keywords: Earnings guidance, Liquidity, Information asymmetry, Earnings management

JEL Classification: G14, G38

Suggested Citation

Hu, Xiankui and Hwang, Joon Ho and Jiang, Christine X., The Impact of Earnings Guidance Cessation on Information Asymmetry (March 25, 2012). Available at SSRN: https://ssrn.com/abstract=1461890 or http://dx.doi.org/10.2139/ssrn.1461890

Xiankui Hu (Contact Author)

Arkansas State University - College of Business ( email )

2713 Pawnee
P.O. Box 1750
Jonesboro, AR 72467-115
United States

Joon Ho Hwang

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Christine X. Jiang

Fudan University ( email )

School of Management
Shanghai, 200433
China
862125011085 (Phone)

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