Management Earnings Guidance Research Articles

Trading off managerial and investor uncertainty in firm disclosure: Evidence from R&D investments and management guidance

AbstractClassic disclosure theory suggests that investor uncertainty increases the probability of discretionary disclosure, while managerial uncertainty decreases this disclosure. Because R&D projects are inherently risky, R&D‐intensive firms face high managerial uncertainty as well as high investor uncertainty. This paper empirically examines how R&D intensity impacts the provision, horizon, and content of management earnings guidance. To address endogeneity concerns, state‐level R&D tax credits serve as an instrumental variable for R&D intensity. I find that high R&D firms do not provide less earnings guidance than low R&D firms. However, they issue more quarterly guidance but less annual guidance. This substitution strengthens when there is high managerial uncertainty about the success of R&D projects. Consistent with litigation risk leading to asymmetric disclosure incentives, the decrease in annual earnings guidance is concentrated in positive guidance. Overall, the results imply that firms modify the horizon and content of their earnings guidance by substituting long‐term positive guidance with short‐term guidance when managerial uncertainty discourages the issuance of the former.

CEO Narcissism and Properties of Analysts’ Forecasts

SYNOPSIS Using a sample of S&P 500 companies, this study constructs a measure of CEO narcissism and examines whether and how it impacts the accuracy and dispersion of analysts’ forecasts. Empirical evidence suggests that firms with narcissistic CEOs have higher accuracy and lower dispersion of such forecasts. In investigating the mechanism through which CEO narcissism impacts these properties, we find that firms with narcissistic CEOs are more likely to issue management earnings guidance, albeit less accurate, which results in significant differences in accuracy and dispersion of analysts’ forecasts. This study concludes that through more management voluntary disclosure, CEO narcissism has a positive impact on the accuracy and a negative impact on the dispersion of financial analysts’ forecasts. Although several studies have explored the effect of CEO narcissism on corporate financial reporting, this is the first study to expand such inquiry into the sector of financial analysts. JEL Classifications: G17; M12; M41.

Earnings Performance Targets in Annual Incentive Plans and Management Earnings Guidance

ABSTRACTWe study how corporate boards set earnings performance targets in CEOs’ annual incentive plans (AIPs) and the implications for strategic management earning guidance. We find that corporate boards rely on management and analyst information in setting the earnings performance targets, and the weight placed on each signal increases with its precision. We also find that management earnings guidance issued before compensation committee meetings (“event-window management forecast (MF)”) is more pessimistic than that issued by the same firm at other times. The pessimism in the event-window MF is more pronounced when the expected managerial benefits of having lower performance targets are greater. Ex post, the event-window MF pessimism is associated with higher bonus payouts to CEOs. We use a theoretical framework to illustrate how the use of earnings performance targets might drive our findings. This study highlights boards’ tradeoffs in designing executive compensation and the resulting managerial strategic disclosure.JEL Classifications: G34; M41; M52.

Investor Response to Bad News versus Good News Management Earnings Guidance

SYNOPSISPrior research consistently reports stronger stock price responses to bad news management guidance than to good news guidance. Based on this result, several studies use the direction of guidance as a proxy for its credibility. We propose that managers opportunistically issue some small bad news guidance for the purpose of reducing earnings expectations to beatable levels. We expect investors to view small bad news guidance as less credible than small good news guidance. We find that investors respond less to small bad news guidance than to similar magnitudes of good news guidance. We show that investor skepticism is justified because small bad news guidance is generally less accurate than the prevailing consensus analyst forecast, whereas other guidance is typically more accurate than the prevailing consensus analyst forecast. Furthermore, the likelihood that bad news guidance is less accurate than the prevailing analyst forecast has increased since the mid-1990s.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: D84; G10; M41.

Stock liquidity and societal trust

Stock liquidity is a sign of market efficiency and a crucial factor of a well-functioning market. Using US data, we present empirical evidence that a company’s stock liquidity is positively associated with regional societal trust. Further analyses indicate that this relationship becomes stronger when companies are more opaque and weakly governed. Regional societal trust as an informal monitoring mechanism is captured with county-level social capital that has two aspects of ethical norms and solid social networks. These aspects bring about trust, reciprocity, honesty, transparency, and organizational citizenship that is ultimately reflected in higher firms’ stock liquidity. We also identify a potential channel through which we can explain the positive association between a company’s stock liquidity and regional societal trust Particularly, we report that companies located in high societal trust areas provide more accurate management earnings guidance. Ultimately, we find that companies situated in high societal trust areas have lower cost of equity capital as they have better access to equity market financing through stock liquidity.

Unpacking the Impact of Overconfidence on Firm Performance

We report a surprising finding where one-third of a firm’s asset value is explained by the overconfidence of the group making the firm’s strategic decisions. This result emerges from an empirical analysis of a group-level overconfidence construct and its impact on firm performance using a real-world data set. Our overconfidence construct examines the behavior of the group, not just the CEO, and it allows us to simultaneously analyze the impact of two facets of overconfidence – overestimation and overprecision bias. Using proxies derived from management earnings guidance we find that overestimation has a sizeable, negative impact, which is uncorrelated with overprecision’s sizeable, positive impact on firm performance, and we show that these relationships are plausibly causal.

Relative Performance Goals and Management Earnings Guidance

Relative Performance Goals and Management Earnings Guidance

Consistency in Management Earnings Guidance Patterns

Synopsis The research problem I examine management earnings guidance patterns measured by the specific quarters in which a firm issues guidance each year. Using a constant sample, I document that a large and increasing percentage of firms provide guidance in consistent patterns over consecutive years, suggesting that the benchmark of their current guidance provision should be their prior guidance, not no guidance as implicitly assumed in prior empirical research that focuses on guidance levels. Motivation and theoretical reasoning I study changes in guidance provision to recognize firms’ prior guidance as their benchmark, which is also consistent with survey evidence (e.g., Graham et al. , 2005 ) and the dynamic disclosure theory (e.g., Einhorn & Ziv , 2008 ) that managers’ default disclosure choice is likely their prior disclosure practice rather than no disclosure at all. The test hypotheses Controlling for known guidance determinants, I hypothesize that firms with consistent (but not necessarily frequent) past guidance act more like regular guiders; their subsequent guidance provisions are less likely to change and are less sensitive to guidance determinants. Adopted methodology and findings Controlling for known guidance determinants, I find that firms with consistent (but not necessarily frequent) past guidance act more like regular guiders; their subsequent guidance provisions are less likely to change and are less sensitive to guidance determinants. These results are robust to using a sample matched on the propensity of issuing consistent guidance in the past and to using a two-stage model that explicitly models the past guidance consistency. Furthermore, I find that the timing and the precision of guidance with a consistent pattern exhibit less temporal variability than guidance with an inconsistent pattern. Target audience and implications Overall, while prior studies use past guidance frequency to identify regular guiders, my findings suggest that the consistency in past guidance patterns can significantly refine this identification. Moreover, to better understand managers’ guidance decisions, researchers can recognize a firm’s past guidance as the benchmark (i.e., the default choice) of its current guidance by examining the changes in guidance patterns.

Discussion of “Consistency in Management Earnings Guidance Patterns”

In this discussion of Tang [( 2022 ). Consistency in management earnings guidance patterns, The International Journal of Accounting, 57, p–p. https://doi.org/xxxx], I point out the research design considerations and provide some directions for future research in the area of voluntary disclosures related to management earnings guidance.

Relative Performance Goals and Management Earnings Guidance

Relative Performance Goals and Management Earnings Guidance

Trust in Numbers: Joint Effects of Management Earnings Guidance Quantification and Attribution Quantification on Investor Judgment

Trust in Numbers: Joint Effects of Management Earnings Guidance Quantification and Attribution Quantification on Investor Judgment

CEO beauty and management guidance

PurposeThe authors study whether CEO beauty influences management guidance.Design/methodology/approachThe authors calculate an attractiveness score based on facial symmetry and perform regression analyses to examine the relation between CEO beauty and management guidance.FindingsThe authors find that attractive CEOs are more likely to issue voluntary management earnings guidance. After controlling for this appearance-based self-selection, the authors document that management forecasts provided by attractive CEOs are more optimistic yet less precise. Consistent with this result, the authors find that analysts' consensus forecast error following management forecasts made by attractive CEOs is larger than such error following management forecasts made by unattractive CEOs. The authors further find that the perceived credibility of management forecasts by attractive CEOs is not different from that by unattractive CEOs.Originality/valueThese findings suggest that attractive CEOs are more active but less skillful in issuing management forecasts. This adds to the emerging accounting literature on the relation between facial appearance and information delivery.

Management Earnings Guidance as a Commitment Device

This paper examines whether issuing management earnings guidance motivates a firm to raise its performance. We hypothesize that managers understand failing to attain a forecast reflects poorly on them and would ex post motivate management and employee effort. Thus, managers choose to issue guidance ex ante to commit themselves to exert this effort. Consistent with this commitment, management then hone their firm’s production function to raise firm performance. In our analyses, we find evidence supporting this hypothesis: management issue guidance and raise performance at firms where commitment should be most beneficial for the firm, such as where (i) employee effort is impactful, (ii) performance is credibly measured, and (iii) capital markets strongly reward increased performance. Further, we find that firms alter their operating activities, rather than manage their accruals, to increase performance. The enhancement in firm performance from using managerial earnings guidance as a commitment device is accomplished by reductions in operating leverage and is strongest among firms issuing moderately aggressive forecasts. Excessively aggressive forecasts, on the other hand, yield no performance benefit. Inconsistent with concerns that forecasting causes myopia and incentivizes short-term real earnings management, performance increases persist for several years.

Management Earnings Guidance and Expected Jump Risk

Management Earnings Guidance and Expected Jump Risk

Withdrawal of Management Earnings Guidance During the COVID-19 Pandemic

The Covid-19 pandemic has produced unprecedented adverse macroeconomic conditions for many firms. It has also provoked a surge in firms withdrawing prior guidance—a corporate disclosure phenomenon that has captured the attention of media and practitioners. In this paper, we examine how firms’ vulnerability to the pandemic affects their guidance withdrawals. Our empirical analysis reveals that firms more affected by the pandemic are more likely to withdraw guidance, consistent with firms’ unwillingness to publicly commit to targets when facing macroeconomic adversity. The effect is more pronounced for firms facing higher litigation risk and product market competition, which is consistent with these conditions making the firm less willing to publicly commit to targets in the face of adversity. We also provide evidence that firms with greater exposure to the pandemic are likely to take the combined action of withdrawing prior guidance and stopping the issuance of new guidance. Moreover, we find that among firms that withdraw guidance, those whose performance subsequently improves are more likely to reinstate their guidance. Finally, we document that firms with greater exposure to the pandemic mention the pandemic less often during earnings conference calls, suggesting that the unwillingness to disclose information about the pandemic extends beyond quantitative disclosure to qualitative disclosure. Overall, our paper offers early and novel evidence on how the pandemic has affected corporate disclosure.

The Politics of Management Earnings Guidance Bias

The Politics of Management Earnings Guidance Bias

The Rewards for Meeting or Beating Managers' Own Earnings Guidance

SYNOPSIS This study documents a stock return premium for meeting or beating management's own earnings guidance (MBMG) that is separate and distinct from the premium for meeting or beating analysts' earnings forecasts (MBAF) documented in prior literature. Cross-sectional analyses reveal that the MBMG premium relative to the MBAF premium increases when management guidance is more informative. We also find that MBMG is incrementally informative about a firm's future performance after considering MBAF. Our findings suggest that investors consider management earnings guidance to be a performance threshold in addition to analyst earnings forecasts when forming earnings expectations. Data Availability: All data are available from public databases identified in the paper. JEL Classifications: D84; G14; G17; M41.

Investors' Responses to Reported Earnings when Management Issues Goal versus Expectation Earnings Guidance: An Experimental Investigation

ABSTRACTWe investigate whether nonprofessional investors' responses to a company's reported earnings differ when management earnings guidance is presented as a goal or an expectation. We present 64 M.B.A. students and 262 MTurk participants with earnings guidance, manipulating between subjects whether management provides the guidance as a “goal” or an “expectation” and whether the company's reported earnings fall short or exceed investors' expectations as derived from management's earnings guidance. Our experimental results suggest that if earnings guidance is issued as a goal rather than as an expectation, investors respond less negatively when earnings fall short of investors' expectations, but not less positively when earnings exceed investors' expectations. Mediation analysis supports the interpretation that earnings falling short of investors' expectations leads investors to perceive managers as less competent and to be more disappointed when managers issue expectation rather than goal guidance, which in turn influences investors' attractiveness judgments of the company.

Do Managers Disclose or Withhold Bad News? Evidence from Short Interest

ABSTRACT Prior studies provide conflicting evidence as to whether managers have a general tendency to disclose or withhold bad news. A key challenge for this literature is that researchers cannot observe the negative private information that managers possess. We tackle this challenge by constructing a proxy for managers' private bad news (residual short interest) and then perform a series of tests to validate this proxy. Using management earnings guidance and 8-K filings as measures of voluntary disclosure, we find a negative relation between bad-news disclosure and residual short interest, suggesting that managers withhold bad news in general. This tendency is tempered when firms are exposed to higher litigation risk, and it is strengthened when managers have greater incentives to support the stock price. Based on a novel approach to identifying the presence of bad news, our study adds to the debate on whether managers tend to withhold or release bad news. Data Availability: Data used in this study are available from public sources identified in the study.

How informative is qualitative management earnings guidance?

In this paper I examine the information content of qualitative management earnings guidance relative to quantitative guidance. Hirst et al. (2008) note that managers may issue earnings forecasts in either qualitative or quantitative forms. Prior research on the consequences of forecast form has focused primarily on different forms of quantitative earnings guidance. This work either finds no effect of forecast form or that more precise guidance is more credible or informative. Using a sample of 14,468 quantitative EPS forecasts and 1265 qualitative EPS forecasts, I find that qualitative bad news forecasts are more informative to investors (i.e., have a stronger market reaction) and analysts (i.e., have larger earnings revisions) than quantitative bad news forecasts. By way of an explanation, I find that qualitative bad news forecasts are more accurate ex post than quantitative bad news forecasts. The results indicate that in the case of bad news EPS forecasts, the qualitative forecast form itself provides a signal to market participants, above and beyond the actual earnings expectation, that the forthcoming earnings surprise may be more negative than anticipated, and that investors and analysts react accordingly.