Within-industry timing of earnings warnings: do managers herd?

Abstract

An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers' warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms accelerate their warnings in response to peer firms' warnings. We conduct several tests to control for alternative explanations for warning clustering (for example, common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers' herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers' disclosure decisions that alerts researchers to consider or control for herding when they examine other determinants of managers' disclosure decisions.

Earnings Attribution and Information Transfers

“…To make the hand‐collection task more manageable, we focus only on annual management earnings forecasts that are issued after the earnings announcement of the prior year. An advantage of focusing on annual management forecasts is the absence of herding (e.g., Tse and Tucker ) . To isolate the information transfer of management forecasts from that of earnings announcements, we exclude management forecasts that are released concurrently with interim earnings announcements .…”

Acquisitions and CEO power: Evidence from French networks

“…Finally, managerial herding behavior can play an important role in managers' decisions (Tse and Tucker, 2010), especially their acquisition activity. First, CEOs want to enhance their reputations as decision makers (Akdogu, 2009;Scharfstein and Stein, 1990).…”

To Guide or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance*

“…Previous studies (Dye and Sridhar 1995; Gul and Lundholm 1995; Tse and Tucker 2009) suggest that a firm’s disclosure decision is influenced by the actions taken by its peers; that is, firms tend to herd. To quantify this factor, we define for each sample firm IndNo , which is the proportion of companies in the firm’s 2‐digit Standard Industrial Classification (SIC) code that do not provide any quarterly guidance in the pre‐event period.…”