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

Abstract

We 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.

The Joint Influences of Resource and Time Bases in Management Earnings Guidance Disclosure

“…Second, different for investors’knowledge in describing an attribution of management earnings guidance information, which it will bring about different evaluation. Hirst et al (1999), Libby et al ( 2006 ), Han and Tan ( 2007 ) and Fanning ( 2018 ) demonstrated that the effects of guidance forms are contingent on investor’ knowledge, only high-knowledge investors are more confident in their earnings estimation, rather than that low-knowledge investors. Third, the material case in this experimental setting not be identified and measured about good news versus bad news of management earnings guidance and macroeconomics information, 12 so they are possible that uncontrolled differences between investors’ perseption in which give to respon imperfect and less sophisticated.…”

“…To develop the next study, it is necessary to consider those attributions especially the ones related to bad news forecast. Some possibilities to develop future research are to consider the form of management earnings guidance information as the research conducted by Han and Tan ( 2007 ) and Fanning et al ( 2018 ). Furthermore, there are still some more dimensions of multiple reference points can be tested by future studies (Baginski et al 2004 ), as an example (Internal: product/service issues/actions/real activity of strategy, organizational issues; External: general economic/environmental issues, governmental, recession/inflation; Future information: analys forecast, financial forecast and so on).…”

“…The next development of research is related to the study of management earnings guidance (management’s earnings forecast) that is considered to have a better future information quality than forecast analyst (Ajinkya and Gift 1984 ; Patell 1976 ; Baginski et al 2004 ). Han and Tan ( 2007 ) 1 , and Fanning et al ( 2018 ) 2 by using an experiment, tested the disclosure of management earnings guidance.…”

“… 2 Fanning et al ( 2018 ) investigate whether nonprofessional investors' responses to a company's reported earnings differ when management earnings guidance is presented as a goal or an expectation. Their 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.…”