How Patterns of Past Guidance Provision Affect Investor Judgments: The Joint Effect of Guidance Frequency and Guidance Pattern Consistency

• In Event: DSFI no. 2

Abstract

Theory suggests that the provision of voluntary disclosure, in itself, is informative to investors, but prior empirical research largely focuses on investors’ reaction to the content of disclosure. We extend the empirical literature on earnings guidance by experimentally examining how investors react to a firm’s historical pattern of guidance provision, holding constant guidance content. We examine two dimensions of guidance provision—how often guidance is provided (frequency) and whether guidance is provided for the same quarter(s) across consecutive years (pattern consistency). We predict and find a stronger positive effect of consistent guidance patterns on investors’ judgments when guidance frequency is low than when frequency is high. A causal path model suggests that investors’ attribution of inconsistent guidance patterns to managerial opportunism is stronger when guidance frequency is low than when frequency is high. These attributions, in turn, negatively affect investors’ likelihood of investing via lower confidence in their earnings estimates. Our findings have implications both for researchers and for practitioners.

Authors

• Shankar Venkataraman, Georgia Institute of Technology

• Michael Tang, New York University