Management Guidance and Monetary Policy Transmission in the Eurozone

Abstract

We study whether management guidance affects how stock prices respond to monetary policy shocks in the Eurozone. Using intraday data to measure European Central Bank’s interest rate surprises, we show that issuing earnings guidance prior to the announcement attenuates the stock reaction for young firms by as much as 35 percent. This effect is stronger for firms with high information asymmetry and those that rely on external financing. The nature of the guidance —sentiment, precision, credibility, frequency, and disaggregation— all impact the relation between stock prices and monetary policy changes. Our findings are consistent with the hypothesis that monetary policy is especially important for high-information-asymmetry firms and that managerial guidance reduces the exposure to monetary shocks for such firms.

Keywords: Management earnings guidance; monetary policy; European Central Bank; Information asymmetry

JEL Classification: E52, E58, G12, G14, G32, M41