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Abstract
Practitioner surveys and the academic literature present conflicting views on why firms stop issuing short-term earnings forecasts, as well as on the expected consequences of cessation. The practitioner literature argues that forecasting quarterly earnings exacerbates managers focus on short-term performance (i.e., managerial short-termism). In contrast, academic research concludes that firms stop quarterly guidance to deemphasize their financial performance and that this opportunistic cessation impairs the information environment without curbing managerial short-termism. To address this controversy, I use ex ante observable characteristics of firms that stopped issuing management forecasts of quarterly earnings between 2002 and 2009 to classify them as either: (1) opportunistic stoppers who stop quarterly guidance to deemphasize declining performance despite heightened demand for management guidance or (2) focus-shifters who cease quarterly guidance to focus on long-term performance in increasingly competitive product markets. Then, I examine how focus-shifters post-cessation changes in managerial short-termism and information environments differ from those of opportunistic stoppers. I find that post-cessation, focus-shifters reduce managerial short-termism by increasing long-term investment and decreasing short-term earnings management, relative to both (1) opportunistic stoppers and (2) matched firms that continue issuing quarterly guidance. Also, whereas opportunistic stoppers information environments deteriorateanalyst forecast quality declines and information asymmetry among investors increasesfocus-shifters maintain stable information environments even after cessation by replacing the discontinued quarterly guidance with other disclosures. My evidence suggests that the practitioner and academic perspectives on the motives for and consequences of quarterly guidance cessation are not mutually exclusive; each perspective is valid for predictably different groups of firms.