Can Supplementary Disclosures Eliminate Post-Earnings-Announcement Drift? The Case of Management Earnings Guidance

46 Pages Posted: 3 Feb 2008

See all articles by Haidan Li

Haidan Li

Santa Clara University - Leavey School of Business

Senyo Y. Tse

Texas A&M University - Lowry Mays College & Graduate School of Business

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

Li, Haidan and Tse, Senyo Y., Can Supplementary Disclosures Eliminate Post-Earnings-Announcement Drift? The Case of Management Earnings Guidance (January 1, 2008). Available at SSRN: https://ssrn.com/abstract=1087050 or http://dx.doi.org/10.2139/ssrn.1087050

Haidan Li (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-5181 (Phone)

Senyo Y. Tse

Texas A&M University - Lowry Mays College & Graduate School of Business ( email )

Wehner 401Q, MS 4353
456C
College Station, TX 77843-4218
United States
979-845-3784 (Phone)

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