Management Retraction of Previously-Issued Earnings Guidance

Abstract

We examine the disclosure choice faced by managers when a previously-issued earnings forecast becomes inaccurate. In some cases, managers explicitly update the forecast with a revised earnings estimate, while in other cases, managers withdraw the original forecast without providing an update. We find that the latter choice, unexplored in prior research, has significantly negative short-term consequences, leading to both increases in uncertainty and decreases in stock price. The decision to retract forecasts also has longer-term consequences; investors respond less strongly to realized earnings, suggesting that they perceive those realized earnings to be imprecise or not reflective of future earnings. Finally, we find that firms are more likely to be sued following the retraction of previously-issued guidance and that this likelihood is driven by the large negative stock price reaction to the retraction announcement. This latter result suggests that early issuance of imprecise information is less effective at curbing litigation risk than later issuance of more precise information.

Keywords: Management Earnings Guidance; Guidance Withdrawals

JEL Classification: M41