Every so often, there is a watershed moment that changes the outlook of the entire economy, almost overnight. The declaration of a global pandemic in early 2020 was one such moment. No one knew exactly how large-scale lockdowns would affect different sectors of the economy — and it was not initially clear how governments would provide supports for businesses or the hundreds of millions of people thrown abruptly into unemployment. Adding to the difficulties, many publicly traded companies had to contend with management guidance that made revenue predictions in a pre-March 2020 world.

“Managers at publicly traded companies issue guidance that forecasts sales or earnings before their earnings reports,” says Xijiang Su, a PhD candidate at the Rotman School of Management. “They forecast a range of what they expect revenues and earnings-per-share to be, and this helps investors to know how managers are thinking about the future. Investors adjust their expectations based on these forecasts, and the issuance of management guidance can cause very significant market reactions.”

All of a sudden, those predictions could be very wrong. Management guidance provided only a few weeks earlier were now hopelessly obsolete. It is highly unusual for guidance to be withdrawn, but in 2020, it happened. A lot.

In research published in the Review of Accounting Studies, Su and Rotman professor of accounting Ole-Kristian Hope explored this phenomenon and its implications for understanding corporate disclosure practices during times of heightened economic uncertainty.

In normal circumstances, management sometimes revises guidance downward when they believe their forecasts can no longer be achieved. This can push a company’s stock price lower, but management often prefers to give investors fair warning, rather than surprising them with a brutal earnings report. And when a firm does not perform as well as expected, management will sometimes cease providing guidance at all because it is causing a stock’s price to fluctuate too much. But it is very rare for guidance to be withdrawn entirely.

The 2020 phenomenon drew the attention of major financial media outlets like The Wall Street Journal and CNBC, which even speculated that it could be time to end the practice of providing guidance for good. But why did these guidance withdrawals happen at all?

Su and Hope’s research found that it was not because companies anticipated poor performance. Exposure to uncertainty was the most important variable, and businesses that depended on welcoming customers in person were particularly exposed. Restaurants and hotels were subject to a patchwork of public health restrictions that allowed them to welcome guests in some jurisdictions but not others. For example, while Ontario and Quebec endured extended lockdowns that forced restaurants to take-out only menus, restaurants in British Columbia were never forced to stop welcoming customers at all.

“Hospitality businesses were significantly influenced by the pandemic,” says Su. “They are labour intensive, and could be short of labourers. Their supply chains could also be affected. Their overall exposure to the pandemic is high, and the uncertainty for these businesses is also high.”

Litigation risk is another reason why companies pulled their management guidance. Companies that provide misleading information can be sued by their investors, and it’s not an infrequent occurrence. The management of companies with high levels of pandemic-related uncertainty could not revise their guidance accurately, even if they wanted to.

“Firms did not know what to do. Management guidance provided before the pandemic may not have been applicable in this rapidly changing environment, and management decided to withdraw it because investors could sue their company for providing misleading information,” says Su.

Yet in spite of these actions, the withdrawals did not have a negative impact on a company’s stock price — though they did result in abnormally high trading volumes.

“Investors did not generally interpret the announcement of a guidance withdrawal as bad news. There was no significant change in earnings per share estimates made by analysts after a withdrawal took place. During the pandemic at least, analysts did not interpret a withdrawal to necessarily mean bad economic news,” says Su. “Investors appeared to understand that it was difficult to issue accurate estimates in such difficult and uncertain circumstances.”