Management Earnings Guidance and Stock Price Crash Risk

• In Event: Voluntary Disclosure: Consequences

Abstract

Hutton, Marcus, and Tehranian (JFE, 2009) show that more transparent financial reporting of earnings reduces the likelihood of a future stock price crash. We extend their work by examining how management earnings guidance is associated with such crash risk. We find that higher management forecast frequency is associated with higher crash risk, which contrasts with the notion that more guidance enhances transparency and reduces crash risk. Consistent with agency problems being an explanation, we find that the positive association is intensified for firms with higher executive stock ownership, lower percentage of dedicated institutional ownership, lower litigation risk, and upward-biased forecasts. We also show that the positive association between opacity in reported earnings and crash risk in Hutton et al. (2009) is stronger when opacity is coupled with frequent earnings guidance.

Authors

• Edward Xuejun Li, Baruch College–CUNY

• Jeffrey Ng, Massachusetts Institute of Technology

• Sophia JW Hamm, The Ohio State University