Why Do Firms Issue Disaggregated Earnings Guidance? The Archival Evidence

This study uses archival data to identify the determinants of firms' decision to provide disaggregated earnings guidance. Of the S&P 500 firms that issue annual earnings guidance, 38.8% also provide annual guidance for sales and operating costs (disaggregated earnings guidance). We find that the likelihood of issuing components of earnings guidance is associated with good news earnings guidance, favorable forthcoming sales performance, low value relevance of earnings, high institutional ownership, and high analyst following. These findings suggest that guidance disaggregation is primarily associated with enhancing the credibility of good news earnings guidance and responding to the demand for additional disclosures. We further observe that 59.1% of our sample firms that provide earnings guidance continue their respective guidance disaggregation practice in the following year, suggesting that the practice is somewhat sticky.