An Examination of Non-Investor Stakeholders’ Use of Earnings Heuristics

• In Event: Welcome to Financial Reporting

Abstract

The firm has numerous non-investor stakeholders such as customers, employees, and potential business partners that provide needed monetary and nonmonetary support to the firm. I provide empirical evidence on the previously untested theoretical prediction that these stakeholders’ views of the firm depend on a firm’s ability to meet relevant earnings benchmarks. Using published and proprietary reputation scores to capture stakeholder perceptions, I find that non-investor stakeholders’ perceptions are positively associated with a firm’s ability to beat relevant earnings benchmarks and that the relevant earnings benchmark for each stakeholder group varies based on the nature of their claim. Specifically, customers’ perceptions are positively associated with a firm’s ability to meet the profit benchmark. Potential business partners’ perceptions are positively associated with a firm’s ability to meet both the analyst forecast benchmark and the earnings growth benchmark. Employees’ perceptions are positively associated with a firm’s ability to meet the earnings growth benchmark. These findings highlight broader uses of and broader audiences for accounting information than previously documented.

Author

• Sijing Wei, University of Maryland-College Park