Investor reactions to management earnings guidance attributions: The effects of news valence, attribution locus, and outcome controllability

Abstract

We conduct two experiments to investigate how investors react to attributions accompanying management guidance. In our first experiment, we investigate the joint effect of attribution locus (external versus internal attribution) and guidance-news valence (positive versus negative guidance news) on investors' earnings judgments. We find that investors provide lower earnings estimates when management attributes negative guidance news to external factors than internal factors. When the guidance news is positive, the locus (internal versus external) of the attributions has no effect on investors' earnings estimates. In our second experiment, we separate out the effect of the attribution's outcome controllability (controllable versus uncontrollable) from that of attribution locus in a negative guidance news setting. We find that investors provide higher earnings estimates for internal/outcome controllable attributions than for internal/outcome uncontrollable attributions. Outcome controllability does not matter when attributions are external. Our study extends prior research by showing how the valence of management guidance and the characteristics of guidance attributions jointly influence investors' earnings judgments.

The Joint Effect of Accounting Knowledge and Self-serving Attribution on the Voluntary Disclosure of Management Earnings Forecast

“…This behaviour is referred to as self-serving attribution (Bettman & Weitz, 1983;Miller & Ross, 1975). The application of internal and external attributions within public statements has been well documented in earlier studies (Baginski et al, 2000;2004;Barton & Mercer, 2005;Bettman & Weitz, 1983;Chen et al, 2016). It is observed that many managers tend to engage the attribution strategies in order to sway the perceptions of market participants (Barton & Mercer, 2005;Kimbrough & Wang, 2014).…”

“…Prior empirical research (Baginski et al, 2004) noted that earnings forecast disclosure is frequently accompanied by external attributions. In practice, managers rarely attribute their earnings disappointments to internal causes (Chen et al, 2016). It is possible that when managers expect upcoming earnings to be disappointing, they would initially seek out the causes, whether internal or external.…”

“…Participants randomly receive the explanation which states that either the internal or external factors have caused the management's expected earnings (THB 0.90) to be lower than the previous quarter's earnings figure, and the analysts' consensus earnings forecasts (THB 1.10). The internal and external attributions are based on prior studies of attribution locus (Chen et al, 2016). In order to validate the instrument, all the case materials used in this study are pilot tested with 43 other graduate students who do not participate in the main study.…”

“…In relation to this, previous research (Baginski, Hassell, & Hillison, 2000;Baginski, Hassell, & Kimbrough, 2004) indicated that there are stronger market reactions when a causal explanation or attribution is given than when there is an absence of attribution. The attribution theory says that individuals tend to provide the explanation by associating it with internal (self) or external (outside of self) causes (Heider, 1958;Weiner, 1985) and poor results were likely to be associated with external causes (Baginski et al, 2004;Chen, Han, & Tan, 2016;Kimbrough & Wang, 2014). In other words, people tend to explain the causes in ways that "flatter them" or "put them in a good light" (Kimbrough & Wang, 2014).…”

“…Given this limitation, the current study utilises an experimental method to examine whether self-serving attributions (both internal and external) influence the managers' decision to disclose earnings forecasts and if so, how does this takes place. Studies (Baginski et al, 2004;Chen et al, 2016) suggested that managers tend to provide attributions for firms' negative performance, but they rarely attribute these performances to internal causes. This study, thus assumes that managers will be less willing to disclose disappointing earnings forecasts when they are given internal attributions, as opposed to external attributions.…”