How Informative Is Qualitative Management Earnings Guidance Compared to Quantitative Guidance?

Management earnings guidance is one of the primary sources of earnings expectations for market participants. Broadly speaking, managers disclose their guidance either quantitatively or qualitatively. Comparing these guidance forms by type of news, I find that qualitative bad news forecasts are more informative to investors (i.e., have a stronger market reaction) and analysts (i.e., have larger earnings revisions) than quantitative bad news forecasts. With respect to good news earnings forecasts, I find no significant effect of guidance form. By way of an explanation, I find that qualitative bad news forecasts are more accurate ex post than quantitative bad news forecasts. Empirical results indicate that investors view qualitative bad news forecasts as a signal that the forthcoming earnings surprise may be more negative than anticipated. This result contrasts with prior studies which generally find that more precise earnings guidance is more informative – at least among alternative types of quantitative earnings guidance. Supplemental analysis reveals that managers‘ concern for litigation exposure provides a potential explanation as to why firms might issue qualitative bad news forecasts over quantitative forecasts