Why Do Firms Release Profit Warnings?

François Aubert () and Waël Louhichi ()
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François Aubert: University of Clermont Auvergne
Waël Louhichi: ESSCA School of Management

Economics Bulletin, 2020, vol. 40, issue 2, 1056-1067

Abstract: Over the last decade, an increasing number of traded companies have decided to release profit warnings (PWs). The aim of this paper is to determine the motives that influence the decision of managers to disclose or withhold bad news. Accordingly, we model the warning decision by a logit model. Based on a sample of 3254 PWs issued by US and European firms over the period 2000–2015, we find that the exposure to potential litigation costs is an important incentive for the decision to issue a warning. We also show that the firms that disclose PWs are those characterized by a large size, greater analyst coverage, low leverage, and high quality of auditing. However, it seems that managers of firms that are in financial distress and with important institutional shareholders tend to withhold bad news. This situation is strengthened when managers have greater incentives (stock options grants) to avoid a decline in the stock price.

Keywords: Profit warnings; voluntary disclosure; earnings surprise. (search for similar items in EconPapers)
JEL-codes: G3 M4 (search for similar items in EconPapers)
Date: 2020-04-15
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