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The Impact of Earnings Guidance Cessation on Information Asymmetry

Authors

  • Bill Hu,

    Corresponding author
    • Address for correspondence: Bill Hu, College of Business, Arkansas State University, State University, AR 72461, USA. e-mail: xhu@astate.edu

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  • Joon Ho Hwang,

  • Christine Jiang

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    • The first author is from the College of Business, Arkansas State University, State University, AR 72461. The second author is from the Korea University Business School, Anam-dong, Seongbuk-gu, Seoul, 136-701, Korea. The third author is from Fogelman College of Business and Economics, The University of Memphis, Memphis, TN 38152. The authors thank Bidisha Chakrabarty, Pankaj Jain, Thomas McInish, Kelly Price, Jim Upson, and the participants of research seminars at the University of Memphis, Korea University Business School, and the 2009 FMA annual conference for comments and suggestions. An anonymous referee and Stephen Young (Editor) provided valuable comments that substantially improved earlier versions of this paper. Joon Ho Hwang acknowledges financial support from the Korea University Business School research grant. Christine Jiang acknowledges financial support from the University of Memphis summer research grant. (Paper received January, 2011, revised version accepted December, 2013).


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.

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