Financial analysts are crucial information intermediaries in capital markets. Their consensus earnings estimates are widely used to assess firm performance. Given the market influence of financial analysts, managers have an incentive to issue earnings guidance to help analysts update their earnings expectations. Firms commonly issue earnings guidance at the same time as earnings announcements (EAs)—a practice termed “bundled guidance” or “bundling.” Filling a major gap in the literature, Charles Hsu of HKUST and a colleague investigated whether and how bundling affects the weight that financial analysts place on managerial guidance when revising their earnings forecasts. The researchers also compared the extent to which investors value analysts’ forecast revisions following bundled guidance and non-bundled guidance.

“We posit that analysts respond more to the news in bundled guidance than in non-bundled guidance when revising their earnings forecasts,” the authors explain, “for three reasons.” First, analysts are under considerable time pressure to process managerial information and provide timely forecasts around EAs. “Bundled guidance,” say the researchers, “is thus released during a time when clients demand timely forecasts.” Second, as analysts receive large volumes of information around EAs, they face cognitive constraints on their information processing. “Analysts may thus rely heavily on bundled guidance in order to revise their forecasts quickly after an EA,” note the authors. Third, firms tend to disclose additional information around EAs, such as during conference calls. This may increase the credibility of bundled guidance, making analysts more responsive to such guidance.

To test their hypotheses, the researchers conducted rigorous empirical tests of managerial quarterly earnings guidance data over the 1998–2017 period. “We find that bundled guidance influences analysts’ expectations more than non-bundled guidance,” they report. In addition, analysts revised their forecasts more quickly after receiving bundled guidance than after non-bundled guidance. “This is consistent with the notion that bundling helps analysts issue forecast revisions quickly when they are facing greater time pressure and cognitive constraints,” the authors explain, “and when they find managerial guidance more credible.”

Interestingly, the researchers also found that following bundled guidance, analysts’ forecast revisions spurred particularly strong market reactions. “We show that investors respond more strongly to analysts’ forecasts that follow bundled guidance,” state the authors, “than to those forecasts that follow non-bundled guidance.” This suggests that the market places great value on timely forecast revisions made by analysts following bundled guidance.

The practice of bundling managerial earnings guidance with quarterly EAs is becoming increasingly common. This research provides timely and innovative insights into how financial analysts process information around EAs and in response to bundling. The findings indicate that it is important for managers to provide bundled guidance to accommodate analysts’ need to issue timely forecasts after EAs. “By aligning managerial guidance with analysts’ routine revision activity,” say the researchers, “bundling facilitates analysts’ forecast revisions.” Bundling may thus offer an effective guidance strategy for firms, improving managers’ ability to influence analysts’ expectations of firm future performance and the wider capital market.