Earnings Guidance and Market Uncertainty
54 Pages Posted: 28 Apr 2008 Last revised: 14 Sep 2011
Date Written: August 17, 2009
We study the effect of disclosure on uncertainty by examining how management earnings forecasts affect stock market volatility. Using implied volatilities from exchange-traded options prices, we find that management earnings forecasts, on average, increase short-term volatility. This effect is attributable to forecasts that convey bad news, especially when firms release forecasts sporadically (as opposed to on a routine basis). In the longer run, market uncertainty declines after earnings are announced regardless of whether there is a preceding earnings forecast. This decline is mitigated when the firm issues a forecast that conveys negative news.
JEL Classification: D8, G14, M4
Suggested Citation: Suggested Citation