Earnings Guidance: Diminishing but Still Relevant : A Study About the Earnings Guidance Phenomenon and Predictability on the Stockholm Stock Exchange
Aim: The aim of this paper is to document the earnings guidance phenomenon and to investigate the relationship between earnings guidance and predictability on the Stockholm Stock Exchange during the period 2005-2014.
Theoretical framework and hypotheses: The efficient market hypothesis argues that a market is inefficient when prices do not reflect all available information. The asymmetric relationship between company and investors, as described by agency theory, illustrates this market inefficiency. Forward-looking information from companies to investors is believed to mitigate the asymmetric relationship and improve the market efficiency. The first hypothesis examines the tendency to issue forward-looking information on the Stockholm Stock Exchange by testing if the proportion of companies that issue earnings guidance has decreased between 2005 and 2014. Meanwhile, the second hypothesis tests if companies that provide earnings guidance on the Stockholm Stock Exchange experience less forecast error.
Methodology: This thesis adopts a combined exploratory and deductive approach in which a t-test and a regression model are used to test the hypotheses. The sample is constituted by 8,087 manually reviewed quarterly financial reports and 262 companies and used for testing the hypotheses.
Findings: The results show that the proportion of companies that issue earnings guidance on the Stockholm Stock Exchange has diminished between 2005 and 2014. More specifically, the drop in EG frequency between 2005 and 2014 equals 16.5 percentage points. The results also indicate, whilst moderate, that earnings guidance is negatively related to forecast error. Thus, companies that provide earnings guidance are more predictable.
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