Private Earnings Guidance and its Implications for Disclosure Regulation

Posted: 6 Apr 2007 Last revised: 21 Oct 2010

Date Written: October 19, 2010

Abstract

This study investigates three related questions: 1) Why did some firms provide private earnings guidance to analysts before Regulation Fair Disclosure? 2) How did the exogenous shock of Regulation Fair Disclosure affect these firms' disclosure policies? 3) What are the economic consequences of this disclosure regulation? To address these questions, I develop a new measure of private earnings guidance.

Consistent with theory, I find that firms were more likely to provide private earnings guidance if they had higher proprietary information costs, and if their earnings were more predictive of other firms' earnings. Policymakers enacted Regulation Fair Disclosure to stop private earnings guidance, but they also intended managers to replace private earnings guidance with public earnings guidance, thereby improving the information environment. However, I find that roughly half of the firms that I classify as relying more on private earnings guidance replace private earnings guidance with nondisclosure instead of public earnings guidance, and as a result, these firms suffer significant deterioration in their information environments. Consistent with theory, firms are more likely to replace private earnings guidance with nondisclosure if they have lower information asymmetry and higher proprietary information costs. On the other hand, firms that replace private earnings guidance with public earnings guidance on average prevent significant deterioration in their information environments. Evidence that firms respond to disclosure regulation as predicted by theory can help policymakers anticipate which firms' information environments are likely to be adversely affected by new disclosure regulations.

Keywords: Disclosure Policy, Disclosure Regulation, Information Environment, Private Earnings Guidance, Regulation Fair Disclosure

JEL Classification: D82, G29, G38, M41, M45, K22

Suggested Citation

Wang, Isabel, Private Earnings Guidance and its Implications for Disclosure Regulation (October 19, 2010). Accounting Review, Vol. 82, No. 5, pp. 1299-1332, October 2007, Available at SSRN: https://ssrn.com/abstract=978482

Isabel Wang (Contact Author)

Michigan State University ( email )

N233 Business Complex
Broad School of Business
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.msu.edu/~wangyany/

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