The impact of unscheduled earnings guidance on pre-earnings announcement information asymmetry - Finnish evidence from 2005-2011

Abstract

Abstract One of the main changes brought along by the new Finnish Securities Market Act (746/2012, enforced as of 1 January 2013) is the repeal of the requirement for listed companies to disclose assessments of their likely future development, or earnings guidance, in conjunction with scheduled interim announcements. In public discussion, the repeal of this requirement has been welcomed by arguments based on, inter alia, that the former more stringent disclosure legislation resulted in an excess amount of unscheduled earnings guidance. This excess flow of unscheduled guidance was argued to be caused by companies having to revisit their forward-looking guidance also in-between interim announcements. Even though this may be a justifiable concern, it is relevant to ask that could the repeal jeopardize some of the positive impacts that the old more stringent requirements may have had in promoting market integrity through, for example, the reduction of information asymmetry?

In this thesis, I contribute to this discussion by analyzing the information asymmetry impact of unscheduled earnings guidance disclosed under the old Securities Market Act in 2005-2011 by firms listed on the NASDAQ OMX Helsinki exchange. I examine whether the level of information asymmetry associated with a firm's share prior to a scheduled earnings announcements is lower than usual if the examined firm has disclosed unscheduled earnings guidance beforehand.

My empirical analyses yield no support for this hypothesis. The main policy implication of this result is that the policy goal of reducing unscheduled earnings guidance disclosures on the Finnish market cannot be criticized from the point of view of potential adverse information asymmetry effects. This is because no observable relationship seems to exist between unscheduled earnings guidance and the strength of pre-earnings announcement information asymmetry.

The methodological approach used in this thesis for quantifying pre-earnings announcement information asymmetry is founded on earlier research, which indicates that deviations in the level of trading volume prior to scheduled information events are associated with information asymmetry. This implies that the strength of these observable deviations could be used as a proxy for quantifying the strength of pre-earnings announcement information asymmetry.

As a secondary contribution, I test these earlier findings with the above-mentioned set of data. I am able to confirm that trading volume does reduce from its normal level prior to scheduled earnings announcements, but stays level prior to unscheduled earnings guidance disclosures. I am thus able to show that the results hold on the Finnish market. This result validates the use abnormal trading volume for quantifying pre-earnings announcement information asymmetry in examining my main hypothesis.