Are all management earnings forecasts created equal? Expectations management versus communication

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Recent studies associate management earnings forecasts (MEFs) with expectations management. These studies, however, neither provide evidence on the extent and scope of expectations management through MEFs nor consider alternative incentives for issuing MEFs. Consequently, existing evidence does not help regulators assess whether MEFs effectively facilitate communication with investors. We investigate to what extent managers exploit their earnings forecasts as a tool of expectations management or as a communication device. By examining relations among MEFs, analysts' forecasts, and actual earnings, we classify MEFs into three incentive categories: (1) expectations management, (2) communication, and (3) other incentives. We find that a significant proportion (approximately 45%) of MEFs is issued to convey accurate earnings information to the market (that is, communication incentive). We also find that the fraction of MEFs for the expectations-management incentive increases post-Regulation Fair Disclosure. The evidence from examination of the various managerial motives for each incentive category supports our classification. Additional analysis using alternative classifications based on bad/good news and pessimistic/optimistic forecasts reveals that our proposed classification of MEFs works better in defining expectations management than these other classifications. This implies that more caution is warranted in defining expectations management when investigating the association between managerial motives and incentives for issuing MEFs.
Publisher
SPRINGER
Issue Date
2012-12
Language
English
Article Type
Article
Keywords

DISCRETIONARY DISCLOSURE; INFORMATION ASYMMETRY; VOLUNTARY DISCLOSURE; ANALYST FORECASTS; STOCK RETURNS; CREDIBILITY; GUIDANCE; ANNOUNCEMENTS; CONSEQUENCES; THRESHOLDS

Citation

REVIEW OF ACCOUNTING STUDIES, v.17, no.4, pp.807 - 847

ISSN
1380-6653
DOI
10.1007/s11142-011-9178-z
URI
http://hdl.handle.net/10203/244366
Appears in Collection
MT-Journal Papers(저널논문)
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