Is openness penalized? Stock returns around earnings warnings

Prior research finds that firms warning investors of an earnings shortfall experience lower returns than non-warning firms with similar risks and earnings news. Openness thus appears to be penalized by investors. Yet, this finding may be due to a self-selection bias that occurs when firms with a larger amount of unfavorable non-earnings news ("other bad news") are more likely to warn. In this paper I use a Heckman selection model to infer the amount of other bad news and document that, on average, warning firms have a larger amount of other bad news than non-warning firms. After controlling for this effect, I find that warning firms' returns remain lower than those of non-warning firms in a short-term window ending five days after earnings announcement. When this window is extended by three months, however, warning and non-warning firms exhibit similar returns. My evidence suggests that openness is ultimately not penalized by investors.