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

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