On Guidance and Volatility
56 Pages Posted: 12 Jan 2014 Last revised: 23 Oct 2014
Date Written: October 22, 2014
Survey evidence suggests that managers choosing to provide earnings guidance do so in order to, among other things, dampen share price volatility. Yet, consultants and influential institutions strongly urge managers to cease guidance — citing a lack of evidence that guidance curbs volatility. Furthermore, recent research links guidance to increased volatility. Hence, some argue that guidance not only fails to promote market tranquility but may actually prompt turbulence. In this paper, we consider the interplay between guidance and volatility, focusing on guidance bundled with quarterly earnings, which now constitutes the vast majority of earnings guidance. Consistent with the notion that volatility concerns factor into managers’ decisions to provide earnings guidance, we find a consistent link between abnormal run-ups in volatility prior to an earnings release and the likelihood that a manager “bundles” a forecast with the firm’s earnings announcement. Our tests also indicate that managers’ efforts do not go unrewarded, as we document abnormally large post-announcement declines in volatility for guidance quarters. Collectively, our evidence supports the view that managers seek to and do mitigate share price volatility with guidance.
Keywords: disclosure, earnings guidance, volatility, information environment, material news items, earnings announcements
JEL Classification: G13, G14, M41
Suggested Citation: Suggested Citation