The novel coronavirus (COVID-19) pandemic has drastically affected the global economy and offers a unique setting to investigate firm and market behavior through periods of heightened economic uncertainty. During the pandemic, many U.S. public firms withdrew their quarterly and annual guidance on their firms’ financial outlook. According to Intelligize, 851 companies announced the withdrawals of their management guidance between March 16 and May 31, 2020. In contrast, guidance withdrawals were rare prior to the pandemic. The large increase in the number of withdrawals has attracted wide attention from investors, regulators, and the media (CNBC 2020; Wall Street Journal 2020). However, this phenomenon is not well understood in the extant literature. In a new study, we empirically analyze the determinants and consequences of these withdrawals during the pandemic. Such knowledge is important for corporations and investors in forming their decisions in the case of similar future events.
Prior literature examines a similar but different type of firm behavior, guidance cessation (e.g., Houston, Lev, and Tucker 2010; Chen, Matsumoto, and Rajgopal 2011). Disclosure theory predicts that firms cease guidance in the presence of negative news (Dye 1985; Verrecchia 1983). Consistent with the theoretical prediction, prior findings suggest that firms that stop management guidance have poorer anticipated future financial performance. These managers have less favorable news to disclose and thus stop issuing guidance for current and future quarters. By contrast, when a firm withdraws outstanding guidance, the firm may resume its guidance after the situation becomes clearer and more stable. In fact, some firms that previously withdrew their guidance during the pandemic have already resumed providing guidance in recent months (IR Magazine 2021). Therefore, guidance withdrawals are less likely driven by anticipated poor financial performance for the relatively long-term future.
We predict that firms withdraw their guidance due to uncertainty resulting from their exposure to the pandemic. For example, the pandemic could have changed customer demand and disrupted supply chains and presented problems for employees trying to adapt to social distancing rules and remote working environments. All these changes could motivate firms to withdraw their previously issued management guidance.
For our empirical analyses, we manually collect a sample of 272 firms that withdrew their guidance during March 2020 by obtaining their 8-K filings from the Securities and Exchange Commission EDGAR website and searching news reports in the FactSet News database. To investigate determinants of the decision to withdraw guidance, we also collect a sample of control firms that issued management guidance before February 2020 but did not withdraw the guidance throughout June 2020. We further adopt a measure of a firm’s exposure to the pandemic from Hassan et al. (2021) based on the frequency of COVID-related words in conference call transcripts. A manager can be expected to have more discussions related to COVID if the firm has greater exposure to it.
Consistent with our prediction and anecdotal evidence, we find that firms with greater COVID exposure are more likely to withdraw their guidance. We also find a higher probability of guidance withdrawal when a firm experiences a larger increase in stock price volatility and thus also greater uncertainty during the pandemic. Further, the probability of guidance withdrawals is significantly higher for cyclical and labor-intensive companies that are expected to be more severely affected by the pandemic. However, we do not find a significant impact of anticipated future performance on guidance withdrawals. Therefore, these findings support the prediction that the decision to withdraw guidance during the pandemic is due to exposure to the COVID and the resulting economic uncertainty rather than anticipated bad economic news.
We further consider the role of litigation risk in moderating the relation between guidance withdrawal and economic uncertainty due to COVID exposure. Practitioners such as regulators and lawyers emphasize the importance of guidance withdrawals in mitigating possible litigation costs during the pandemic (e.g., SEC 2020). The cost of issuing inaccurate guidance is greater for firms facing greater litigation risk. Therefore, we predict that, in the presence of high litigation risk, firms’ decisions to withdraw guidance become more sensitive to their exposure to the pandemic. Consistent with our expectation, we find that firms with higher litigation risk are more likely to withdraw guidance due to their exposure to the pandemic. This finding suggests that even during the pandemic, litigation risk still plays an important role in shaping firms’ disclosure behavior.
To understand the consequences of guidance withdrawals, we next examine the trading-volume and stock price reactions to guidance withdrawal announcements. Following prior research (e.g., Beaver 1968), we calculate abnormal trading volumes based on the ratio of average daily trading volume in the event window to that in a benchmark period. We find that the announcements significantly increase abnormal trading volumes. This finding is consistent with investors responding to withdrawals of management guidance as an important event.
We further examine how investors react to the announcements based on stock returns. If investors view guidance withdrawals as a signal of poor anticipated performance, we expect negative stock-price reactions to the withdrawals. However, if investors believe that withdrawals are driven by the difficulty in issuing accurate estimates rather than by bad news, stock prices may not react negatively. Using alternative measures of stock returns, we do not find evidence of significant negative stock-price reactions to guidance withdrawals. In other words, investors do not generally interpret the withdrawal announcements as bad news. Therefore, investors appear to understand the difficulty in issuing accurate estimates during the pandemic.
We also investigate equity analysts’ reactions to guidance withdrawals. Our regression model with firm fixed-effects find that guidance withdrawals significantly increase analyst forecast dispersion, consistent with prior studies that find higher difficulty for analysts in forecasting firms without management guidance (Lang and Lundholm 1996; Barron, Kim, Lim, and Stevens 1998). In contrast, we do not observe a significant change in earnings per share (EPS) forecast estimates after guidance withdrawals. This finding lends further support to the argument that investors do not generally interpret guidance withdrawals during the pandemic as bad economic news.
Our study has implications for firm disclosure practices and investors during the pandemic as well as similar future events and makes several contributions to the voluntary disclosure literature. First, it contributes to the literature by providing empirical analyses of the large number of guidance withdrawals during the pandemic. As discussed above, this phenomenon has attracted significant attention from investors and regulators. We find that the withdrawals are due to economic uncertainty rather than poor anticipated financial performance. We also find that the stock market and analysts do not penalize guidance withdrawal decisions per se, indicating that the market understands that withdrawal decisions during the pandemic are likely to be attributed to extreme uncertainty rather than negative company news. Such knowledge could help firms evaluate the benefits and costs of guidance withdrawals in similar future events.
Second, studies have examined the effect of uncertainty on firm decision-making or stock market behavior. For example, Joos, Piotroski, and Srinivasan (2016) show that the 2008 financial crisis raised analysts’ awareness of firms’ exposures to macro-economic uncertainty. Bloom et al. (2019) find that uncertainty due to Brexit significantly reduced U.K. firms’ productivity. We contribute to this line of literature by providing evidence that economic uncertainty due to the COVID pandemic affects corporate disclosure behavior and increases firms’ tendency to withdraw their guidance. Given that precedent, it is possible that guidance withdrawals may become more common. Therefore, our findings could help us understand and predict how heightened economic uncertainty and similar events will affect firms’ disclosure. Waymire (1985) examines how uncertainty (measured by firm-level earnings volatility) is related to management guidance. He finds that firms with more volatile earnings provide less guidance. However, the association between earnings volatility and management guidance could be endogenous, as both are affected by managers’ decisions. We examine the considerably more exogenous event of the COVID pandemic and investigate how variations in the exposure to it affect firms’ tendency to withdraw their guidance. Therefore, we believe that our study provides strong evidence on the effect of uncertainty on corporate disclosure behavior.
 We do not find any firms that announced cessation of future guidance in their press releases of guidance withdrawal. Also, Chen et al. (2011) exclude guidance withdrawals from their sample according to their footnote 4.
This post comes to us from Ole-Kristian Hope at the University of Toronto’s Rotman School of Management, Congcong Li at Duquesne University’s Palumbo Donahue School of Business, Mark (Shuai) Ma at the University of Pittsburgh’s Katz Graduate School of Business, and Xijiang Su at the University of Toronto’s Rotman School of Management. It is based on their recent article, “Is Silence Golden Sometimes? Management Guidance Withdrawals During the COVID-19 Pandemic,” available here.