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

• In Event: Investors' Perceptions of Management

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 (consistency). We predict and find that investors are more confident in their earnings estimates and are more likely to invest if a firm’s historical guidance is consistent than if it is inconsistent, but these judgments differ significantly only when guidance frequency is low. Using a causal path model, we show that investors perceive inconsistent guiders as more opportunistic than consistent guiders, when guidance frequency is low but not when frequency is high. Our findings highlight the importance of examining the provision of guidance both for researchers and for practitioners.

Authors

• Shankar Venkataraman, Georgia Institute of Technology

• Michael Tang, New York University