Mary Brooke Billings

On guidance and volatility

In contrast to theoretical and empirical evidence linking disclosure to information environment benefits, recent research concludes that guidance increases volatility, but leaves open the question of whether volatility plays a role in prompting the issuance of guidance. Consistent with the notion that managers react to rising volatility by providing guidance, we document a link between abnormal run-ups in volatility and the decision to issue a forecast after controlling for the market’s ability to anticipate the guidance. Upon disentangling pre-guidance volatility changes from post-guidance volatility changes, we find no evidence that guidance increases volatility. Indeed, our evidence consistently supports the view that managers seek to and do mitigate share price volatility with guidance.

Discussion of “Critical Accounting Policy Disclosures”

Carolyn B. Levine and Michael J. Smith (2011) examine firms’ critical accounting policy (CAP) disclosures. With respect to motivation for disclosure, Levine and Smith (2011) document an increased likelihood of CAP disclosure for firms facing high ex ante litigation risk. Focusing on the informational value of disclosure, they find evidence consistent with CAP disclosure influencing investors’ valuation decisions. Although the paper provides a large sample analysis of a relatively new accounting disclosure practice, I raise some questions about what we can (and cannot) learn from their findings. In so doing, I highlight potential topics for future research.