Updating Forecasts in the Face of a Material Deviation: Nondisclosure, Withdrawals, and Downplaying Communication
52 Pages Posted: 31 Aug 2018 Last revised: 13 May 2020
Date Written: May 12, 2020
We examine the disclosure choices managers make when initial forecasts become materially inaccurate. Despite earnings deviations being material, a number of firms fail to update the market with a new guidance number, either by withdrawing or not updating the initial forecast. Further, even when the forecast is revised, the guidance update is often downplayed. These communication choices have important consequences for equity investors and financial analysts, including less timely incorporation of the earnings information and differential reliance at the announcement dates. Nondisclosure is associated with greater uncertainty about information endowment and a shorter-horizon investor base, relative to revising firms, whereas withdrawals are associated with greater uncertainty about firm performance. Finally, the determinants of downplaying guidance are more consistent with opportunistic incentives rather than incentives to inform.
Keywords: Forecast revisions; material deviations; forecast withdrawals; nondisclosure; forecast transparency
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