Can Supplementary Disclosures Eliminate Post-Earnings-Announcement Drift? The Case of Management Earnings Guidance
46 Pages Posted: 3 Feb 2008
Date Written: January 1, 2008
Abstract
We investigate whether earnings guidance can reduce or eliminate post-earnings-announcement drift. We find that firms that provide earnings guidance simultaneously with their earnings announcements experience significantly less drift than other firms, consistent with our expectations. Furthermore, the reduction in drift is strongly related to current and prior guidance accuracy. Drift is eliminated for firms that provide accurate prior (or current) guidance, but is significant for low-guidance-accuracy firms. Finally, we find post-guidance-announcement drift for stand-alone earnings guidance, but not for guidance that is provided simultaneously with earnings. Our results suggest that simultaneous earnings and guidance announcements enhance analysts' and investors' ability to extract useful information about future earnings from both earnings and guidance announcements. More importantly, our results indicate that investors can use past guidance accuracy to identify firms whose post-earnings-announcement drift is unaffected, or eliminated, by the issuance of management earnings guidance.
Keywords: management earnings guidance, earnings announcements, post-earnings-announcement drift, guidance accuracy
JEL Classification: G14, G29, M41, M45
Suggested Citation: Suggested Citation
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