Skinner (1994) proposes that managers have reputational incentives to preempt negative earnings news and speculates that firms that fail to warn are less likely to be followed by financial analysts. My study formally puts forward this argument and empirically tests the reputational cost of withholding bad news in the form of a decrease in analyst following. I find that among firms with a similar level of existing disclosure reputation, those that fail to warn experience a significant decrease in analyst following relative to those that warn. This finding is consistent with managers' concerns that withholding bad news would damage their reputation for being transparent about forward-looking earnings news.
AnilowskiC.FengM.SkinnerD. J.2007. “Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance.”Journal of Accounting and Economics44 (1–2): 36–63.
2.
AtiaseR. K.SupattarakulS.TseS.2006. “Market Reaction to Earnings Surprise Warnings: The Incremental Role of Shareholder Litigation Risk on the Warning Effect.”Journal of Accounting, Auditing and Finance21 (Spring): 191–222.
3.
BhushanR.1989. “Firm Characteristics and Analyst Following.”Journal of Accounting and Economics11: 255–274.
4.
CFA Institute. 2006. Breaking the Short-Term Cycle.CFA Institute Publications. Codes, Standards, and Position Papers.
5.
ChungK. H.JoH.1996. “The Impact of Security Analysts' Monitoring and Marketing Functions on the Market Value of the Firms.”Journal of Financial and Quantitative Analysis31, no. 4 (December): 493–512.
6.
ConradJ.CornellB.LandsmanW. R.2002. “When is Bad News Really Bad News?”Journal of Finance57 (6): 2507–2532.
7.
DiamondD. W.1989. “Reputation Acquisition in Debt Markets.”Journal of Political Economy97 (4): 828–862.
8.
EasleyD.O'HaraM.2004. “Information and the Cost of Capital.”Journal of Finance59 (4): 1553–1583.
9.
FamaE. F.FrenchK. R.1997. “Industry Costs of Equity.”Journal of Financial Economics43: 153–193.
10.
FrancisJ.SchipperK.VincentL.2002. “Earnings Announcements and Competing Information.”Journal of Accounting and Economics33: 313–342.
11.
FrankelR.KothariS. P.WeberJ.2006. “Determinants of the Informativeness of Analyst Research.”Journal of Accounting and Economics41: 29–54.
12.
GibbinsM.RichardsonA.WaterhouseJ.1990. “The Management of Corporate Financial Disclosure: Opportunism, Ritualism, Policies and Processes.”Journal of Accounting Research28, no. 1 (Spring): 121–143.
13.
GrahamJHarveyC.RajgopalS.2005. “The Economic Implications of Corporate Financial Reporting.”Journal of Accounting and Economics40: 3–73.
HayesR.1998. “The Impact of Trading Commission Incentives on Analysts' Stock Coverage Decisions and Earnings Forecasts.”Journal of Accounting Research36 (2): 299–320.
16.
HealyP. M.HuttonA. P.PalepuK. G.1999. “Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure.”Contemporary Accounting Research16, no. 3 (Fall): 485–520.
17.
HoustonJ. F.LevB.TuckerJ. W.2008. “To Guide or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance.”Contemporary Accounting Research. Forthcoming.
18.
HsiehP.RollerT.RajanD. R.2006. “The Misguided Practice of Earnings Guidance.”The McKinsey Quarterly (March): Web exclusive.
19.
HuttonA.StockenP.2006. “Effect of Reputation on the Credibility of Management Forecasts.” Working paper, Dartmouth College.
20.
IvkovicZ.JegadeeshN.2004. “The Timing and Value of Forecast and Recommendation Revisions.”Journal of Financial Economics73: 433–463.
21.
KasznikR.LevB.1995. “To Warn or Not to Warn: Management Disclosures in the Face of an Earnings Surprise.”The Accounting Review70, no. 1 (January): 113–134.
22.
KingR.PownallG.WaymireG.1990. “Expectations Adjustment via Timely Management Forecasts: Review, Synthesis, and Suggestions for Future Research.”Journal of Accounting Literature9: 113–144.
23.
KrepsD. M.WilsonR.1982. “Reputation and Imperfect Information.”Journal of Economic Theory27: 253–379.
U. S. Chamber of Commerce. 2007. “Commission on the Regulation of U.S. Capital Markets in the 21st Century: Report and Recommendations.”Washington, DC: Government Printing Office.
37.
VeronesiP.1999. “Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model.”Review of Financial Studies12 (5): 975–1007.
38.
WilliamsP. A.1996. “The Relation between a Prior Earnings Forecast by Management and Analyst Response to a Current Management Forecast.”The Accounting Review71, no. 1 (January): 103–113.
39.
WilsonR.1985. Reputations in Games and Markets: Game Theoretic Models of Bargaining, edited by RothA. E.. Cambridge: Cambridge University Press.
