Does the Cessation of Quarterly Earnings Guidance Reduce Investors’ Short-Termism?

53 Pages Posted: 15 Dec 2016 Last revised: 5 Apr 2017

Yongtae Kim

Santa Clara University - Leavey School of Business

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Xindong (Kevin) Zhu

City University of Hong Kong

Date Written: December 12, 2016

Abstract

The practice of providing quarterly earnings guidance has been criticized for encouraging investors to fixate on short-term earnings and encouraging managerial myopia. Using data from the post–Regulation Fair Disclosure period, we examine whether the cessation of quarterly earnings guidance reduces short-termism among investors. We show that, after guidance cessation, investors in firms that stop quarterly guidance are composed of a larger (smaller) proportion of long-term (short-term) institutions, put more (less) weight on long-term (short-term) earnings in firm valuation, become more (less) sensitive to analysts’ long-term (short-term) earning forecast revisions, and are less likely to dismiss chief executive officers for missing quarterly earnings targets by small amounts, relative to investors in firms that continue to issue quarterly earnings guidance. Our study provides new evidence of the benefit of stopping quarterly earnings guidance, that is, the reduction of short-termism among investors.

Keywords: Voluntary Disclosure, Earnings Guidance, Management Forecasts, Investor Short-Termism, Managerial Myopia

JEL Classification: M40, M41

Suggested Citation

Kim, Yongtae and Su, Lixin (Nancy) and Zhu, Xindong (Kevin), Does the Cessation of Quarterly Earnings Guidance Reduce Investors’ Short-Termism? (December 12, 2016). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2885624

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Xindong (Kevin) Zhu

City University of Hong Kong ( email )

Kowloon
Hong Kong

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