Within-industry timing of earnings warnings: do managers herd?

Within-industry timing of earnings warnings: do managers herd? An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms accelerate their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (for example, common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding when they examine other determinants of managers’ disclosure decisions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Within-industry timing of earnings warnings: do managers herd?

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Publisher
Springer US
Copyright
Copyright © 2009 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-009-9117-4
Publisher site
See Article on Publisher Site

Abstract

An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms accelerate their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (for example, common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding when they examine other determinants of managers’ disclosure decisions.

Journal

Review of Accounting StudiesSpringer Journals

Published: Dec 13, 2009

References

  • Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance
    Anilowski, C; Feng, M; Skinner, D
  • Using disclosure to influence herd behavior and alter competition
    Arya, A; Mittendorf, B
  • Voluntary causal disclosures: Tendencies and capital market reaction
    Baginski, SP; Hassell, J; Hillison, WA
  • Further evidence on nontrading-period information release
    Baginski, SP; Hassell, J; Pagach, D
  • Learning from the behavior of others: Conformity, fads, and informational cascades
    Bikhchandani, S; Hirshleifer, D; Welch, I
  • CEO compensation, director compensation, and firm performance: Evidence of cronyism?
    Brick, IE; Palmon, O; Wald, JK
  • Financial analyst characteristics and herding behavior in forecasting
    Clement, M; Tse, S

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