Within-Industry Timing of Earnings Warnings: Do Managers Herd?

Abstract

An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors external to the firm. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms speed up their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (e.g., common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding behavior when they examine other determinants of managers’ disclosure decisions.

Keywords: voluntary disclosure, herding, bad-news disclosure, intra-industry information transfer

JEL Classification: M41, M45