Investors' Reactions to Goal versus Expectation Management Earnings Guidance: An Experimental Examination

• In Event: Guidance Characteristics

Abstract

This study investigates whether managers can offer earnings guidance in a way that tempers investors’ responses to missing the guidance, yet not temper their responses to beating guidance. Our experimental results suggest that investors respond less negatively to missing earnings guidance, but not less positively to beating earnings guidance, when it is described as a goal rather than an expectation. We also provide evidence that investors perceive managers to be less competent for missing expectation earnings guidance than missing goal earnings guidance, which in turn influences investors’ attractiveness judgments of the company. Our study contributes to research and practice by documenting that providing goal earnings guidance can reduce investors’ reaction to earnings guidance misses, yet does not reduce investors’ reaction to guidance beats, suggesting a potential mechanism for reducing managers’ disincentive to issue earnings guidance and for reducing managers’ incentive to manage earnings.

Authors

• Kirsten Fanning, University of Illinois at Urbana–Champaign

• Ling Lin Harris, University of South Carolina

• Kevin E. Jackson, University of Illinois at Urbana–Champaign

• Matthew Thomas Stern, University of Illinois at Urbana–Champaign