Information Leakage Prior to Company Issued Guidance

Abstract

We find that information leakages prior to public guidance issued by company management exist even after Regulation Fair Disclosure (FD), and are more pronounced when characteristics of the firm, the guidance, or the industry reflect higher levels of information asymmetry. Since public guidance is only partially leaked, this information leakage can be used to anticipate the information content of the impending public guidance. We simulate a trading strategy based on the preguidance leakage in the period after Regulation FD, which suggests that information leakage is an effective signal of the information content within impending public guidance.

Does Regulation Fair Disclosure Reduce the Information Quality of Managerial Guidance?

“…4 The estimation period to derive parameters for estimating expected returns surrounding the guidance and earnings releases is from 255 days before the event until 46 days before the guidance and earnings announcements. Consistent with prior research (Sinha and Gadarowski, 2010;Agapova and Madura, 2011), our results show that the magnitude of market response to public managerial guidance decreased after Reg FD for all windows. Table 1 reports signed cumulative abnormal returns (CARs) and absolute values of CARs surrounding public managerial guidance and quarterly earnings releases for various windows before and after Reg FD.…”

“…Ajinkya, Bhojraj and Sengupta (2005) find that firms with high-concentrated institutional ownership that are more capable of generating private information are less likely to issue public voluntary guidance. Sinha and Gadarowski (2010) and Agapova and Madura (2011) report a decline in market response to public managerial disclosures in the post-Reg FD period. In addition, Kothari, Shu and Wysocki (2009) find that the asymmetry of voluntary disclosure between bad news and good news decreased since the introduction of Reg FD.…”

Price Drift Before U.S. Macroeconomic News: Private Information About Public Announcements?

“…The corporate finance literature (for example, Sinha and Gadarowski (2010) and Agapova and Madura (2011)) considers price drift before public guidance issued by company management as de facto evidence of information leakage. Bernile et al (in press) also point to information leakage as the cause of informed trading before the FOMC announcements.…”

“…Information leakage has also occurred in other settings, for example, in the London PM gold price fixing (Caminschi & Heaney, 2013). In corporate finance, some papers (for example, Sinha and Gadarowski (2010) and Agapova and Madura (2011)) regard price drift before public guidance issued by company management as de facto evidence of information leakage while others remain agnostic about the source of informed trading around company earnings announcements (for example, J. Y. Campbell, Ramadorai, and Schwartz (2009) and Kaniel, Liu, Saar, and Titman (2012) in trading by institutional and individual investors, respectively.…”

“…We also use the CARs to quantify the magnitude of the pre-announcement price drift as a proportion of the total price adjustment similarly to Sinha and Gadarowski (2010) and Agapova and Madura (2011) in the corporate finance literature. We calculate the proportion as the CAR during the [t−30min, t−5sec] window divided by the CAR during the [t − 30min, t + 5min] window.…”