THE IMPACT OF GUIDANCE CESSATION ON ANALYST COVERAGE AND THE FIRM’S INFORMATION ENVIRONMENT

Abstract

My study examines in detail the association between guidance cessation and analyst coverage, as well as the effect of guidance cessation on the information environment of the firm. I find strong evidence indicating that post guidance cessation, analyst coverage falls. Additionally, the results of my study indicate that analysts who drop coverage post guidance cessation have characteristics associated with analysts who issue low quality forecasts, and I also find mixed evidence to show that analysts who initiate coverage post guidance cessation have characteristics associated with analysts who issue high quality forecasts. My findings add to the current debate on the pros and cons of maintaining regular management guidance. With strong evidence indicating that analyst coverage falls post guidance cessation, firm managers should be cautioned on the potential ramifications of reduced analyst coverage, such as decreased publicity, level of investor recognition as well as liquidity in any stop guidance decision. At the same time, contrary to what prior literature has suggested, I argue that the information environment of a firm could possibly be enhanced rather than curtailed post guidance cessation. Because an improving information environment could potentially lead to a lower cost of capital for the firm, my results have important real world implications for firm managers and their decision to stop or continue with guidance.