On Guidance and Volatility

56 Pages Posted: 12 Jan 2014 Last revised: 23 Oct 2014

See all articles by Mary Brooke Billings

Mary Brooke Billings

New York University

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance

Baruch Lev

New York University - Stern School of Business

Date Written: October 22, 2014

Abstract

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

Billings, Mary Brooke and Jennings, Robert H. and Lev, Baruch Itamar, On Guidance and Volatility (October 22, 2014). Kelley School of Business Research Paper No. 2014-15. Available at SSRN: https://ssrn.com/abstract=2377415 or http://dx.doi.org/10.2139/ssrn.2377415

Mary Brooke Billings (Contact Author)

New York University ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
(212) 998-0097 (Phone)

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-2696 (Phone)
812-855-5875 (Fax)

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

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