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.

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