On the Willingness of UK Companies to Issue Profit Warnings: Regulatory, Earnings Surprise Permanence, and Agency Cost Effects

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Abstract
This paper presents an empirical study of profit warnings issued by UK companies. The study adds value to the existing literature on warnings because it models the warning decision in a stock market economy that is significantly less litigious than the US. This in turn allows factors, other than the threat of litigation, to influence the decision to warn. In addition we produce evidence on the effect of a change in the London Stock Exchange rules relating to the release of price sensitive information on the frequency and timing of profit warnings. The paper describes the profit warning experience of the London Stock Market for periods surrounding a change in the stock exchange rules governing the issuance of warnings in 1994. Given this background the paper then moves on to model a range of factors that potentially have influenced the decision to warn. Special attention is paid to the influence of ownership structure and bondholder/stockholder conflicts of interest on the decision to warn.