To Guide Or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance

51 Pages Posted: 12 Jan 2006 Last revised: 24 Mar 2019

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Baruch Lev

New York University - Stern School of Business

Jenny Wu Tucker

University of Florida - Warrington College of Business Administration

Date Written: May 22, 2008

Abstract

In recent years, quarterly earnings guidance has been harshly criticized for inducing managerial short-termism and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance - decreased earnings, missing analyst forecasts, and lower anticipated profitability - is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long-term investment once managers free themselves from investors' myopia. Contrary to the claim that firms would provide more alternative, forward-looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.

Keywords: earnings guidance, voluntary disclosure, analyst following, managerial myopia

Suggested Citation

Houston, Joel F. and Lev, Baruch Itamar and Tucker, Jenny Wu, To Guide Or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance (May 22, 2008). Contemporary Accounting Research, 2010, Vol. 27 (1): 143-185, Available at SSRN: https://ssrn.com/abstract=875184 or http://dx.doi.org/10.2139/ssrn.875184

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Baruch Itamar Lev (Contact Author)

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

Jenny Wu Tucker

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

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