On guidance and volatility

Survey evidence suggests that managers voluntarily disclose information, particularly earnings guidance, with an aim toward dampening share price volatility. Yet, consultants and influential institutions advise against providing guidance — citing fears of litigation and market penalties associated with missed earnings targets, as well as a lack of evidence that disclosure actually curbs volatility. Furthermore, recent research links guidance to increased volatility and heightened crash risk. Hence, many argue that guidance not only fails to promote tranquility but may actually prompt turbulence. In this paper, we consider the interplay between guidance and volatility. Consistent with the notion that volatility does indeed factor into managers’ decisions to supply earnings guidance, we provide evidence of a link between increased volatility and the likelihood that a manager chooses to "bundle" a forecast with the firm’s earnings announcement in the current quarter. In particular, our findings indicate that firms in more volatile information environments exhibit a general reticence to offer guidance, but given a recent spike in volatility, managers are more likely to jump in with a forecast seemingly in an effort to calm the market. Subsequent tests indicate that managers’ efforts do not go unrewarded, as we document a greater post-announcement run-down in volatility for guiding firms. Taken collectively, this evidence supports the view that managers can and do positively shape their firms’ information environments by an earnings guidance.