Do Firms Use Early Guidance to Disclose the Effect of Conservatism on Future Earnings?

Forthcoming on the Review of Accounting and Finance

Posted: 8 Oct 2015 Last revised: 28 Jun 2019

See all articles by Carlo D'Augusta

Carlo D'Augusta

Middle Tennessee State University - Jennings A. Jones College of Business

Giulia Redigolo

ESADE Business School; Emory University - Department of Accounting

Date Written: June 26, 2019

Abstract

Purpose – By deferring profits and anticipating losses, conservatism makes earnings increases more persistent and earnings declines more likely to revert. Therefore, the level of conservatism in current earnings has implications for future earnings expectations. Past research shows that outsiders can fail to understand these implications. This paper aims to investigate whether firms help outsiders by voluntarily disclosing their expectations about how conservatism will affect future earnings trends.

Design/methodology/approach – The authors examine the likelihood and content of “early” earnings guidance – i.e. guidance about future earnings that is released around or before the announcement of current earnings. The sample is made of 8,820 annual earnings announcements, 62 per cent of which are combined with early guidance.

Findings – The authors find that the more conservative current earnings, the higher: the likelihood that the firm releases early guidance; the likelihood that the firm predicts a positive change in earnings; and the difference between the forecasted earnings and current earnings. The authors also find such guidance to be relevant to analysts, who use it to update their forecasts.

Practical implications – By showing that firms use early guidance to disclose the effect of conservatism on future earnings, the study is interesting to users and preparers because it shows that analysts need and use such disclosure; and regulators because it alleviates concerns about the information consequences of conservatism.

Originality/value – The findings show that firms do not refrain from committing to positive early guidance to disclose the earnings effects of conservatism. This is interesting in light of the difficulty of predicting such effects, the manager incentives to keep expectations low and the cost of committing to positive guidance instead of less risky qualitative disclosure alternatives. In this way, the authors contribute to the literature on the interrelation between voluntary disclosure and conservatism in financial reports.

Keywords: Voluntary disclosure, Accounting conservatism, Earnings guidance

JEL Classification: G10, M40

Suggested Citation

D'Augusta, Carlo and Redigolo, Giulia, Do Firms Use Early Guidance to Disclose the Effect of Conservatism on Future Earnings? (June 26, 2019). Forthcoming on the Review of Accounting and Finance, Available at SSRN: https://ssrn.com/abstract=2670745 or http://dx.doi.org/10.2139/ssrn.2670745

Carlo D'Augusta (Contact Author)

Middle Tennessee State University - Jennings A. Jones College of Business ( email )

1301 E Main St
Office BAS N403
Murfreesboro, TN Tennessee 37132
United States

Giulia Redigolo

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,534
PlumX Metrics