Management earnings guidance and preference for earnings predictability : the real effects on managerial decisions.
Wang, Elaine Ying.
Date of Issue2011
College of Business (Nanyang Business School)
Prior research finds that frequent and accurate earnings forecasts are beneficial for investors, analysts, and management. My study examines whether the issuance of frequent earnings guidance and the goal to achieve high earnings forecast accuracy may result in unintended negative consequences on firm value creation. One such effect could be that managers may pursue high short-term earnings predictability at the expense of firm value, in order to accomplish their earnings guidance goals. In order to investigate the role of management earnings guidance attributes in managers’ trade-off between total expected earnings and quarterly earnings predictability, I conduct a between-subjects experiment that randomized guidance frequency (frequent or infrequent) and guidance goal (accuracy or beat/meet - when guidance is used to “walk down” the market expectations). I find that frequent guiders with either accuracy goals or beat/meet goals are more likely to sacrifice total expected earnings for quarterly earnings predictability, because they suffer from myopic loss aversion. On the other hand, although infrequent guiders with beat/meet goals are more likely to maximize total expected earnings, infrequent guider with accuracy goals still tend to pursue high quarterly earnings predictability to realize their challenging guidance goals. My study provides psychological and goal-related explanations for managers’ trade-off between conflicting earnings attributes. This study contributes to the existing literature on earnings predictability, management earnings guidance and real economic effect of financial reporting.