Information Dissemination - Spreading the Word

Abstract:

Information dissemination has a significant impact on the investor and analyst reactions to guidance news, and these effects are economically large.

Using a unique sample of over 55,000 articles that relate specifically to management guidance, the author finds that 48 percent of all guidance receives coverage in the business press, with substantial within-firm variation. He then identifies firm and guidance characteristics that are associated with the likelihood that guidance receives press coverage. Controlling for the endogeneity of press coverage, he finds that dissemination in the press has a significant impact on the investor and analyst reactions to guidance news, and these effects are economically large. The author also finds a reduction in subsequent price drift when guidance receives press coverage.

This study is the first to provide evidence that there is systematic variation in the extent to which guidance news is disseminated through the press, and that this variation has a significant effect on the market consequences of guidance.

Introduction

Management earnings guidance is a primary means by which the market adjusts its expectations of firms’ earnings performance (Penman 1980; Cotter et al. 2006; Beyer et al. 2010). One of the main reasons managers choose to issue earnings guidance is to reduce information asymmetry and align market expectations of firm performance with their own private information (Ajinkya and Gift 1984; King et al. 1990).

However, the capital market consequences of issuing earnings guidance are dependent on the guidance being effectively communicated to the market. In this study, The author examines the extent to which the business press facilitates this process by disseminating the information contained in management earnings guidance to market participants. He first identifies firm and guidance characteristics that affect the likelihood that management guidance receives business press coverage. He then examines the effects of guidance dissemination in the business press on market participants’ reactions to the information contained in the guidance.

Empirical evidence of variation in guidance dissemination and the associated market effects can increase our understanding of how information flows from managers to the market and provide evidence on an important link between managers’ voluntary actions and the effects of those actions. Prior research on management guidance provides extensive evidence that the market reacts to the magnitude of the earnings news in the guidance as well as the credibility of the guidance (e.g., Jennings 1987; Hutton and Stocken 2009; Yang 2012).

Implied in most studies is the assumption that the extent of guidance dissemination, or the timing and degree to which market participants are made aware of the guidance, is irrelevant. He proposes that the role of the business press in disseminating guidance news to the market is critical because earnings guidance disclosures are voluntary and typically unexpected (Doyle and Magilke 2012). He hypothesizes that the market reaction to the information contained in management guidance is a function of the extent to which the guidance is disseminated to market participants.

His predictions are based on prior empirical studies that examine the effects of information dissemination in other settings and on theoretical models that are based on the limited attention and information processing power of individuals. Several recent empirical studies provide evidence that the extent and method by which information is disseminated to investors can significantly impact firms’ information environments and stock prices.

These studies examine various dissemination channels such as the business press (e.g., Bushee et al. 2010; Engelberg and Parsons 2011; Li et al. 2011), internet searches (Drake et al. 2012), social media (Blankespoor et al. 2013), and online financial message boards (Lerman 2011). Hirshleifer and Teoh (2003) and Bloomfield (2002) provide a theoretical basis for the notion that the manner in which information is communicated to investors is relevant to prices.

Hirshleifer and Teoh (2003) develop a model in which informationally equivalent disclosures have different effects on investor perceptions, depending on how and where the information is presented. Bloomfield (2002) posits that, because press coverage substantially reduces information acquisition costs, the dissemination of disclosures in the press should be associated with greater price reactions to the information contained in the disclosures, a conjecture the author explicitlies test within the context of management earnings guidance.

The above empirical and theoretical evidence suggests that press coverage may have a significant effect on the capital market consequences of management guidance. However, a long-held assumption in capital markets research is that once a firm publicly discloses value-relevant information, it is instantaneously incorporated into prices, making the mechanism through which the information is disseminated to market participants irrelevant (Merton 1987).

If sophisticated market participants such as institutional investors and financial analysts closely monitor the firms within their purview, they may not depend on the business press for information, particularly with respect to an important, value-relevant corporate disclosure such as earnings guidance (Beyer et al. 2010). In addition, numerous other mechanisms now exist that convey corporate disclosures to market participants; these include corporate websites, email alerts, social media, webcasts, broadcast media, and EDGAR (Blankespoor et al. 2013). Thus, whether press coverage has a significant effect on the pricing of guidance news is ultimately an empirical question.