What Guides the Guidance? An Empirical Examination of the Dynamic Disclosure Theory

• In Event: Voluntary Disclosure: the Role of Analysts and Credit Rating Agencies

Abstract

I develop and investigate a new dimension of earnings guidance – guidance consistency, based on the quarterly patterns of guidance over consecutive years. Dynamic disclosure theory predicts that, after a history of regular guidance, managers have stronger incentives to maintain guidance consistency. Consistent with this theory, I find that firms are more reluctant to deviate from their existing practice after a history of consistent but not necessarily frequent guidance. The result is robust to accounting for the endogeneity of guidance history. Consistent guiders also maintain consistent guidance timing and format over time. Together the results suggest that managers consider guidance as a multi-period decision (as in the dynamic theory) instead of a single-period decision (as in the static theory) as prior empirical research has implicitly assumed.

Author

• Michael Tang, New York University