This paper investigates how often and to what extent quarterly earnings guidance is of poor quality, the causes of poor quality guidance, and the ultimate effect of such guidance on investors' earnings expectations. I operationalize poor quality guidance as that guidance which is directionally incorrect relative to the pre-guidance analyst consensus. Results show that 12% of the sample meets this definition. In terms of what causes directionally incorrect guidance, expectation management and forecast difficulty play an equally important role in determining directionally incorrect guidance. Both analysts and market participants are adversely impacted by directionally incorrect guidance, but substantially less so when the likelihood of directionally incorrect guidance increases. Finally, market participants appear to be more capable of using publicly observable cues to access the likelihood of directionally incorrect guidance increases.
|Journal||Advances in Accounting|
|State||Published - Sep 2017|