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Review of Accounting Studies
Published in: Review of Accounting Studies 4/2023

09-08-2022

Is silence golden sometimes? Management guidance withdrawals during the COVID-19 pandemic

Authors: Ole-Kristian Hope, Congcong Li, Mark Shuai Ma, Xijiang Su

Published in: Review of Accounting Studies | Issue 4/2023

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Abstract

The many management guidance withdrawals during the COVID-19 pandemic have attracted considerable attention from the media, investors, and regulators. This study analyzes the determinants and consequences of these withdrawals. We find that guidance withdrawals are due to economic uncertainty, resulting from firms’ exposure to the COVID-19 pandemic rather than poor financial performance. Also, the effect of COVID-19 exposure on guidance withdrawals is stronger when firms face higher litigation risk. Further, guidance withdrawals result in abnormally large trading volumes and high analyst forecast dispersion but do not harm stock prices or the level of analyst earnings forecasts. Overall we believe the findings have implications for understanding corporate disclosure practices during periods with heightened economic uncertainty.
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Appendix
Available only for authorised users
Footnotes
2
We do not find any firms that announced cessation of future guidance in their press releases of guidance withdrawal. Also, Chen et al. (2011) exclude guidance withdrawals from their sample according to their footnote 4.
 
3
The term “guidance” in our study refers to general financial guidance, which includes both earnings guidance and other types of financial guidance but does not include nonfinancial guidance.
 
11
FactSet has been used to collect corporate financial news in several recent studies (e.g., Brendel and Ryans 2021; Ng et al. 2021).
 
12
The FactSet News database includes both corporate press releases and other news reports written by journalists. All our observations from the FactSet News database are based on firms’ press releases. Around 51% of withdrawal announcements are extracted from the FactSet News database.
 
13
We do not find firms that withdrew management guidance in January or February of 2020. Accordingly, the withdrawal announcements in March 2020 may be unexpected by investors.
 
14
For a firm in the fiscal year of 2019, its fiscal-year ending month could be from July 2019 to June 2020. Thus none of the control firms withdrew their guidance during fiscal year 2019.
 
15
Given that our sample is relatively small, winsorization or truncation could result in loss of information and biases. Therefore, we use the Grubbs tests for potential outliers to ensure that our findings are not attributable to extreme values (e.g., Barbato et al. 2011). We perform the tests for each individual variable separately. The results suggest no outliers in our sample at the 99% confidence level. In untabulated tests, our inferences remain if we winsorize the sample at the top and bottom 1 percentiles.
 
16
To illuminate the validity of our measures, we test their correlations with firm size. Consistent with smaller firms having lower litigation risk, PriorLawsuit is positively correlated with firm size. By definition, Litigation is also lower for smaller firms. Also, consistent with the results of Kim and Skinner (2012), FPS is negatively correlated with firm size.
 
17
One firm announced the withdrawal on a Saturday. We use the following two or three trading days after the announcement for this firm.
 
18
Significant events during the benchmark period would increase the “normal” trading volume during the benchmark period, creating a bias against finding a trading-volume reaction in the event window.
 
19
Research shows asymmetric sensitivity of stock returns to market returns (e.g., Ang et al. 2006). Therefore, in untabulated tests, we separate the market factor in the three-factor or four-factor model into two separate factors: positive market returns and negative market returns. Thus we calculate a positive market beta and a negative market beta for each firm. No conclusions are affected.
 
20
This is possibly because investors expected the content of the press releases in advance. For example, investors could infer a firm’s financial liquidity based on the prior quarter’s financial statements. Also, store closures could also be expected based on government regulations.
 
21
Compared to propensity-score matching and other matching techniques, entropy balancing weights control group observations to reach covariate balancing instead of removing nonmatched observations, leaving the sample size less affected by the matching process. The goal is to match withdrawing firms, which is the treated group (Withdrawal = 1), with non-withdrawing firms, which is the control group (Withdrawal = 0).
 
22
The result of the trading volume test could also be interpreted based on confirmation of underlying uncertainty. We also rerun the trading volume test in the subsample with low uncertainty words and find similar results.
 
23
We cannot achieve covariate balance for ∆ROA, StockReturn, and Size. In untabulated tests, inferences are similar if we do not use entropy balancing for these tests.
 
24
These firms have stopped their guidance from the prior year and thus no longer have guidance to withdraw in the current year. Therefore, we also cannot provide regression analyses using these firms.
 
25
We use three days to ensure it is a relatively short window and potentially incorporates the possibility that the announcement date is a non-working day.
 
26
On one hand, it may take a few days for a firm to respond to peer firms’ withdrawal decisions. On the other hand, using a long window would reduce the variations in these variables. After trading off these, we use a three-day window to measure #Leader and #Total. In untabulated tests, inferences are unaffected if we use two or four days as an alternative window.
 
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Metadata
Title
Is silence golden sometimes? Management guidance withdrawals during the COVID-19 pandemic
Authors
Ole-Kristian Hope
Congcong Li
Mark Shuai Ma
Xijiang Su
Publication date
09-08-2022
Publisher
Springer US
Published in
Review of Accounting Studies / Issue 4/2023
Print ISSN: 1380-6653
Electronic ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-022-09698-w

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