The Impact of Earnings Guidance Cessation on Information Asymmetry

Abstract

This paper studies the impact of quarterly earnings guidance cessation on information asymmetry using a large sample of firms during the years 2002-11. After earnings guidance cessation, information asymmetry may increase because less information is provided to the market. Alternatively, information asymmetry may decrease if managers have less pressure to manage reported earnings to meet guidance numbers. Our study shows guidance cessation significantly reduces information asymmetry compared to matched non-guiders and guidance maintainers. We also find that firms engage in less earnings management after guidance cessation, especially for firms that had provided guidance on a persistent basis.