How Patterns of Past Guidance Provision Affect Investor Judgments: The Joint Effect of Guidance Frequency and Guidance Pattern Consistency
46 Pages Posted: 30 Mar 2016 Last revised: 21 Jan 2019
Date Written: December 21, 2016
Disclosure theory suggests that the provision of voluntary disclosure, in itself, is informative to investors, but prior empirical research largely focuses on investors’ reaction to the content of disclosure. We extend the literature on earnings guidance — a key voluntary disclosure — by experimentally examining how investors react to a firm’s historical pattern of guidance provision, holding constant guidance content. We manipulate two dimensions of guidance provision — how often guidance is provided (frequency) and whether guidance is provided for the same quarter(s) across consecutive years (pattern consistency). We find that guidance consistency positively impacts investors’ confidence and likelihood of investing when guidance frequency is low, but not when frequency is high. A causal model suggests that this interaction is driven by investors perceiving inconsistent guiders as more opportunistic than consistent guiders, but only when frequency is low. Our findings suggest that providing guidance consistently mitigates investors’ negative views associated with infrequent guidance.
Keywords: guidance frequency, guidance pattern consistency, investor judgments
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