Does Management Guidance Help Resolve Uncertainty around Macroeconomic Announcements?
52 Pages Posted: 13 Aug 2019 Last revised: 29 Aug 2019
Date Written: May 20, 2019
We examine whether management guidance contains complementary information that helps resolve investor uncertainty around macroeconomic announcements. We find that when firms issue a management earnings forecast in the month prior to a Federal Open Market Committee (FOMC) announcement of the Federal funds rate target, they experience a significantly larger decrease in implied volatility around the announcement. This effect is more pronounced for firms that are more financially constrained and for firms that have greater investment opportunities, consistent with guidance having greater information complementarities when firm investment is more sensitive to interest rate news. We further find that the guidance effect is stronger for firms that issue capital expenditure forecasts along with earnings forecasts, for firms with more accurate forecasts, and for firms that issue guidance closer to the FOMC announcement. These results suggest that management guidance conveys useful firm-specific information that complements macroeconomic information in resolving investor uncertainty, highlighting an unintended benefit of management guidance.
Keywords: management earnings guidance; voluntary disclosure; uncertainty; implied volatility; monetary policy; macroeconomic announcements; investment sensitivity
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