International Diversification and Management Earnings Guidance

Abstract

The objective of this paper is to examine the relation between the degree of international diversification and management earnings guidance. Using 30,941 firm-year observations, we find that more internationally diversified firms are less likely to issue earnings guidance and their disclosure quality (measured using the Francis et al. [2008] voluntary disclosure index) tends to be lower. This pattern is especially pronounced in the post-Reg FD period, when managers are required to make voluntary disclosure of information public. Second, the evidence shows that management earnings forecasts of more internationally diversified firms were more accurate prior to Reg FD, suggesting that capital market incentives (i.e., cost of capital reduction) induced more diversified firms to issue higher quality guidance. However, post-Reg FD, more internationally diversified firms issued less accurate forecasts, consistent with the notion that agency and proprietary cost concerns from making all disclosures public led these firms to reduce disclosure quality. Both of these results are largely consistent with the chilling effect of Reg FD on information flow (e.g., Opdyke 2000; Wang 2007).