Moving Forward: Management Guidance and Earnings Announcement Returns

We provide new evidence on the role of management guidance in explaining earnings announcement-period returns. We show that guidance practices changed around the financial crisis in ways likely to affect the information content of guidance bundled with earnings. Managers provide guidance for a number of metrics and have moved towards annual and away from quarterly guidance, perhaps because of concerns about the managerial “myopia” some associate with quarterly EPS guidance. EPS and/or sales guidance news is incrementally informative and explains returns to about the same extent as earnings news, more so when earnings disappoint or firms report large beats. Specifications that capture the sign and consistency of signals are about as informative as those that use magnitudes. Similar to previous evidence, the response is asymmetric, with a stronger response to adverse earnings news accompanied by downgrades.