The Implications of Voluntary Disclosure for Research on the Asymmetric Timeliness of Earnings

Abstract

We document how disclosure of management earnings forecasts (MFs) affects the asymmetric timeliness of earnings measured using the Basu (1997) model. The rationale to expect an effect is that managers care about when good and bad news gets incorporated into price. Managers’ decision about when to disclose information via MFs impacts the measured asymmetric timeliness of their firms’ earnings for the period via the MFs effect on returns. This effect of managerial disclosure on asymmetric timeliness is distinct from managers’ decisions about when to recognize an item in earnings via GAAP accounting policy choices (e.g., write-offs and accruals). We examine the effect of MF disclosure empirically by forming subsamples partitioned on MF characteristics (e.g., horizon and news content). We find that measured asymmetric timeliness is insignificant for firms issuing MFs of future-year earnings (forward-looking MFs). Further analysis reveals that the weaker asymmetric timeliness of firms issuing forward-looking MFs is concentrated in bad news MFs, consistent with a downward bias in the asymmetric timeliness coefficient related to prices leading earnings more in periods with forward-looking MFs. Additional tests reveal that the dampening effect of forward-looking MFs on asymmetric timeliness is correlated with fundamental determinants of conservatism examined in prior research, and absent for book-based (i.e., financial statement) measures of asymmetric timeliness.