Discussion of “On Guidance and Volatility”

Billings et al. (2015) hypothesize that managers issue guidance in response to increased market uncertainty about their firm's prospects, and that guidance is an effective way of reducing increased uncertainty. They test these hypotheses by examining changes in implied option volatility for a sample of firms that issue guidance in conjunction with earnings announcements. The findings support their hypotheses, but there are challenges in their interpretation given prior evidence that predictable information events cause similar patterns in implied option volatility.