Is Silence Golden? Earnings Warnings and Subsequent Changes in Analyst Following

Abstract

Skinner (1994) proposes that managers have reputational incentives to preempt negative earnings news and speculates that firms that fail to warn are less likely to be followed by financial analysts. My study formally puts forward this argument and empirically tests the reputational cost of withholding bad news in the form of a decrease in analyst following. I find that among firms with a similar level of existing disclosure reputation, those that fail to warn experience a significant decrease in analyst following relative to those that warn. This finding is consistent with managers' concerns that withholding bad news would damage their reputation for being transparent about forward-looking earnings news.

Keywords

Earnings Warning Disclosure Reputation Analyst Following Voluntary Disclosure

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