Consistency in Management Earnings Guidance Patterns

Abstract

Synopsis The research problem I examine management earnings guidance patterns measured by the specific quarters in which a firm issues guidance each year. Using a constant sample, I document that a large and increasing percentage of firms provide guidance in consistent patterns over consecutive years, suggesting that the benchmark of their current guidance provision should be their prior guidance, not no guidance as implicitly assumed in prior empirical research that focuses on guidance levels. Motivation and theoretical reasoning I study changes in guidance provision to recognize firms’ prior guidance as their benchmark, which is also consistent with survey evidence (e.g., Graham et al. , 2005 ) and the dynamic disclosure theory (e.g., Einhorn & Ziv , 2008 ) that managers’ default disclosure choice is likely their prior disclosure practice rather than no disclosure at all. The test hypotheses Controlling for known guidance determinants, I hypothesize that firms with consistent (but not necessarily frequent) past guidance act more like regular guiders; their subsequent guidance provisions are less likely to change and are less sensitive to guidance determinants. Adopted methodology and findings Controlling for known guidance determinants, I find that firms with consistent (but not necessarily frequent) past guidance act more like regular guiders; their subsequent guidance provisions are less likely to change and are less sensitive to guidance determinants. These results are robust to using a sample matched on the propensity of issuing consistent guidance in the past and to using a two-stage model that explicitly models the past guidance consistency. Furthermore, I find that the timing and the precision of guidance with a consistent pattern exhibit less temporal variability than guidance with an inconsistent pattern. Target audience and implications Overall, while prior studies use past guidance frequency to identify regular guiders, my findings suggest that the consistency in past guidance patterns can significantly refine this identification. Moreover, to better understand managers’ guidance decisions, researchers can recognize a firm’s past guidance as the benchmark (i.e., the default choice) of its current guidance by examining the changes in guidance patterns.