Abstract
This study develops and tests a model of manager reporting credibility in an earnings guidance setting. Specifically, I use an experiment to examine whether short horizon investors differ from long horizon investors in their sensitivity to forthcoming disclosure regarding negative earnings news. I find that short horizon prospective investors exhibit an incremental sensitivity to forthcoming disclosure regarding negative earnings news in comparison with long horizon current investors. Consistent with prior research I also find that long horizon current investors’ assessments of management’s reporting credibility are unresponsive to forthcoming earnings guidance. Similarly, I find that short horizon current investors also exhibit differential sensitivity to forthcoming disclosure regarding negative news in comparison with long horizon current investors. Overall, the results suggest that management forthcomingness can have a positive impact on managers’ long-term reporting credibility and this effect is greatest for investors with short investment horizons when earnings news is negative. The results should inform managers who are interested in maximizing the effectiveness of their earnings guidance.
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