Forward-Looking Statements and Investor Trading Costs

• In Event: Management Decision-Making

Abstract

We examine the relation between forward-looking statements (FLS) and information asymmetry to explore the role of FLS in the trade-off between the lost edge of insider access versus the information processing edge of sophisticated versus unsophisticated outside traders. We conduct textual analysis on 10K and 10Q filings from 1996 to 2020 and find that FLS are associated with a reduction in information asymmetry. This reduction is more pronounced for firms with relatively high dedicated or low transient institutional ownership and for firms that provide FLS updates. Firms with high-ability managers tend to issue more FLS, further reducing information asymmetry. The incidence of FLS has increased through time with a significant spike in recent years, as firms increasingly substitute earnings guidance with FLS. The reduction in information asymmetry is greater for firms that provide FLS than for firms that provide earnings guidance. FLS, with its substitute role, has increased in importance as many firms stopped providing earnings guidance during the pandemic.

Authors

• Jing-Chi Chen, The University of Memphis

• Pankaj Jain, The University of Memphis

• Sabatino Silveri, The University of Memphis